Commerce Union Bank v. May

• Decision Date: 03 December 1973
• Citation: 14 UCCRep.Serv. 146,503 S.W.2d 112
• Parties: 14 UCC Rep.Serv. 146 COMMERCE UNION BANK, Appellant, v. Henry E. MAY, Sr., et al., Appellees.
• Court: Tennessee Supreme Court

Page 112

503 S.W.2d 112

14 UCC Rep.Serv. 146

COMMERCE UNION BANK, Appellant, v. Henry E. MAY, Sr., et al., Appellees.

Supreme Court of Tennessee.

Dec. 3, 1973.

William J. Harbison, Herman O. Loewenstein, Nashville, for appellant.

Walter C. Kurtz, Russell Overby, Nashville, for Henry E. May, Sr.

Howard F. Butler, Nashville, for Joe F. Shelby and wife, Pauline G. Shelby.

OPINION

FONES, Justice.

The parties will be referred to as follows: Commerce Union Bank, complainant below, as complainant; Henry E. May, Sr., as May; Joe F. Shelby and wife, Pauline Shelby, as the Shelbys, or May and the Shelbys, as defendants, where appropriate.

Complainant sued defendants in the Chancery Court of Davidson County, for a deficiency balance, stipulated to be $4,811.01, plus interest and attorney's fees, due upon a note secured by trust deed on real estate, following default in the payment of the note and a foreclosure sale.

Prior to the foreclosure sale the Mayfair Hotel, located on the premises covered by the deed of trust, was destroyed by fire. The fire insurance policy covering the improvements on said realty had expired, for failure to pay the premium, approximately three months prior to the fire.

The Chancellor held that, under the facts of this case, the law imposes, '. . . a duty on a commercial creditor to act to preserve the security for a surety without notice by either notifying the surety or obtaining insurance coverage at the expense of the debtor.' The facts having been stipulated, complainant perfected its appeal to this Court from the decree of the Chancellor dismissing the complaint.

The facts stipulated and shown by exhibits are:

Complainant made a loan to May, in the principal sum of $6,451.20. May executed a note for said principal amount, dated March 28, 1967, payable in sixty monthly installments of $107.52, beginning May 5, 1967. As security for the payment of said note, May executed a deed of trust upon realty in Davidson County, upon which was situated the Mayfair Hotel. A policy of fire insurance was procured by May from Thomas Jefferson Insurance Company for the period from April 12, 1967 to April 12, 1968. May was the insured and complainant was shown as mortgagee in said policy and a memorandum of the policy was delivered to complainant.

The deed of trust executed by May contained the following provision:

'And I agree to keep all the buildings on said property insured in some reliable fire insurance company or companies for the sum of $_5r_ until the sum herein secured is fully paid, and to have the loss made payable on the policy to said Trustee for the benefit of the owners and holders of the debt herein secured.'

The note executed by May contained the following provision:

'Bank shall have no liability to perform services, send notices or take action of any kind in connection with the management of the collateral except to account for property actually received by it and shall have no duty to take action in preserving any of the collateral except upon notice from the undersigned and provision for reimbursement of any expenses to be incurred.'

On October 21, 1967, the Shelbys purchased the hotel property from May and assumed the mortgage.

On October 25, 1967, Charles R. Kyle, et ux. purchased the hotel property from the Shelbys and assumed the first mortgage. A second mortgage was executed by the Kyles to secure a $4,000 note payable to the Shelbys.

On October 27, 1967, Ramsay Realty & Auction Company wrote a letter to complainant, with reference to the May loan, advising that said Realty Company had handled the sale of the Mayfair Hotel from May to the Shelbys, and a few days thereafter, from the Shelbys to the Kyles; that in both sales, complainant's loan balance was assumed by the grantees; that the Shelbys had taken a second mortgage and desired to be notified in the event that payments on the first mortgage should become delinquent; that the Kyles agreed to take care of proper endorsement of the fire insurance and to increase it by $4,000.

A letter exhibit, dated March 28, 1968, reflects that Robert R. Street, presumably the agent of Thomas Jefferson Insurance Company, wrote to Charles Kyle, at the Mayfair Hotel, giving notice that the fire insurance policy would expire on April 12, 1968. There is no evidence in the record that a copy of said notice was given to or received by complainant, May or the Shelbys. The hotel was destroyed by fire in July, 1968.

There is no evidence in the record that complainant or May or the Shelbys had any knowledge, prior to the fire, that the premium to renew the fire insurance had not been paid.

The Kyles defaulted in the payment of the second mortgage obligation to the Shelbys and the Shelbys foreclosed on August 14, 1968. The Shelbys sued the Kyles in the Circuit Court of Davidson County and obtained a judgment for the deficiency on the second mortgage in December, 1968. The Shelbys purchased the property at the foreclosure sale and again assumed the first mortgage held by complainant.

At some unspecified time thereafter, default occurred in the payment of the note held by complainant. A foreclosure sale pursuant to the terms of the first deed of trust was held on October 27, 1970, and complainant filed this suit for the deficiency balance resulting from said sale, on December 4, 1970.

Charles Kyle and his wife filed petitions in bankruptcy, listed the debt due complainant, and were discharged.

In his analysis of the instant case, the learned Chancellor held that, upon the sale of encumbered real estate and assumption of the mortgage by the purchaser, the original mortgagor becomes a mere surety for the purchaser, who then becomes the principal debtor. Under this rule the Chancellor concluded that May was entitled to assert the defenses available to sureties under the equitable principles of suretyship, having 'recast' his role from that of maker of the note to surety for the Shelbys. Wright v. Bank of Chattanooga, 166 Tenn. 4, 57 S.W.2d 800 (1933), was cited as authority by the Chancellor for said conclusion.

In Wright, Bank was not the maker of the note. Wright made a loan to McBrien, et ux. and they executed a note and deed of trust on realty to secure same. Bank purchased the land from the McBriens and assumed the mortgage debt and subsequently conveyed the land to Jenkins, and he assumed the debt. Wright granted an extension of the due date of said note to Jenkins without the knowledge or approval of the Bank. The Chancellor held that, inasmuch as Bank and Jenkins' names did not appear on the note, their obligation was not controlled by the negotiable instrument law, but by equitable principles of suretyship. This Court agreed and affirmed the Chancellor in holding that Wright's extension of payment to Jenkins discharged Bank.

Mr. Justice Cook, writing for the Court, said:

'While the Negotiable Instruments Law may rigidly fix rights and obligations, according to the tenor of the instrument and as between the holder and parties to the instrument, as held in Atlantic Life Insurance Co. v. Carter, (165) Tenn. (628) 57 S.W. (2d) 449 opinion filed February 25, 1933, the act does not protrude into the realm of equity jurisprudence and impair or destroy rights and equities arising from independent contract between the mortgagor, his grantees, and the mortgage creditor. By such contracts, parties Whose names do not appear on the instrument representing the mortgage debt are often brought into circumstances which result as a legal consequence, independent of the instrument and uncontrolled by the Negotiable Instruments Law, in establishing either a primary or a secondary liability for the debt.' (Emphasis supplied).

In Atlantic Life Insurance Co. v. Carter, 165 Tenn. 628, 57 S.W.2d 449 (1932), the Carters were the makers of a note evidencing an indebtedness to Insurance Co. They sold the land which was mortgaged to secure said debt to Bailey, who assumed its payment as part of the purchase price. Insurance Co. granted Bailey an extension of payment without the knowledge or consent of the Carters. Bailey defaulted and Insurance Co. sued the Carters who defended upon the ground that when Bailey assumed the payment of the note he became primarily liable and they, being only secondarily liable, were released by said extension, without their consent. The Court observed that, independent of the Uniform Negotiable Instruments Law, this would unquestionably be correct. However, the Court held the Carters liable, predicated upon an analysis of Sections 60 and 120 NIL.

Section 60 NIL declared that the maker of a negotiable instrument engages that he will pay it according to its tenor. Section 120 NIL provided that a person secondarily liable on an instrument was discharged if the holder extended the time of payment without the assent of said party. Said Section also contained five other grounds for discharge of parties Secondarily liable. The Court noted that said discharge provisions are not available to persons Primarily liable. In rejecting the argument that the maker becomes secondarily liable upon the assumption by his grantee of the debt, the Court quotes from Union Trust Co. v. McGinty, 212 Mass. 205, 98 N.E. 679, as follows:

'The obligation of all makers, whether for accommodation or otherwise is to pay to the holder for value according to the terms of the bill or note. Their obligation is primary and absolute. . . . The act makes no provision for the proof of another and different relation than that expressly undertaken and defined by the tenor of the instrument signed.'

The principle declared in Atlantic Life Ins. Co. v. Carter, supra, that the maker of a note cannot recast his role to that of surety by transfer of the property and assumption of the debt by his grantee, and thus remains primarily and absolutely liable on the note, is still the law in Tennessee unless it has been changed by the UCC. It is urged in this Court on...