Duncan v. Claiborne County Bank

• Decision Date: 25 October 1985
• Citation: 705 S.W.2d 663
• Parties: David DUNCAN and wife, Wanda Duncan, Plaintiffs-Appellees, Cross-Appellants, v. CLAIBORNE COUNTY BANK, Defendant-Appellant. 705 S.W.2d 663
• Court: Tennessee Court of Appeals

Page 663

705 S.W.2d 663

David DUNCAN and wife, Wanda Duncan, Plaintiffs-Appellees Cross-Appellants, v. CLAIBORNE COUNTY BANK, Defendant-Appellant.

705 S.W.2d 663

Court of Appeals of Tennessee Eastern Section.

Oct. 25, 1985.

Permission to Appeal Denied by Supreme Court

Feb. 24, 1986.

John M. Neal, Morton, Lewis, King & Krieg, Knoxville, for defendant-appellant.

David H. Stanifer, Stanifer & Stanifer, Tazewell, for plaintiffs-appellees, cross-appellants.

OPINION

FRANKS, Judge.

In this action, the chancellor awarded plaintiffs judgment for $24,449.00, the amount deposited by defendant in its bank, and any accrued interest on the savings account. The bank has appealed, insisting plaintiffs had executed agreements with the bank which entitled it to the proceeds of the account.

On March 26, 1981, David and Wanda Duncan executed a deed of trust on a lot located in the Barren Creek Subdivision in Claiborne County, which they owned as tenants by the entirety. The trust deed secured two notes to the defendant with a combined balance of $62,179.60. The trust deed provided, in addition to the stated indebtedness, the instrument would:

[S]ecure any and all other indebtedness due from First Parties or either of them, whether direct or indirect to said Claiborne County Bank, its successors or assigns up to an amount not exceeding $100,000.00 ... which may be now or hereafter held by, or become due to said Claiborne County Bank within a period of ten years from the date of this instrument.

In 1983, at various times, David Duncan as co-owner of two businesses executed seven promissory notes to Claiborne County Bank and personally guaranteed the debts. The pertinent provision in the notes is:

Set Off--I acknowledge and agree that you may set off all or any part of the note total against any obligation you may have, now or hereafter to pay money to me. This includes

(a) any deposit account balance I have with you whether time, savings, checking or NOW account; and

(b) any money owing to me on an item presented to you or in your possession for collection or exchange; and

(c) a repurchase agreement or any other non-deposit obligation.

The notes further provide the lender could exercise its right to set-off "without prior demand or notice," and if the debtor's right to receive money was "also owned by some other person" the lender's set-off rights extended to that amount which the debtor could withdraw or receive on his own endorsement.

In October, 1984, a collection officer at the bank approached David Duncan and informed of a potential buyer for the Barren Creek property. Without knowing the identity of the buyers the Duncans, after negotiations with the bank, agreed to sell the property for $59,000.00. The bank's officer prepared an option agreement for a consideration of $1,000.00 which the Duncans received. On December 5, 1984, at the closing of the sale arranged by the bank, David Duncan was presented a cashier's check drawn on the bank for $58,000.00. ¹ The Duncans signed a warranty deed conveying the property to the purchasers. David Duncan detected an omission in the deed and took the deed from the bank to get it corrected. Before leaving, he endorsed the cashier's check and left it on the bank officer's desk. The deed was corrected in a lawyer's office and, since one of the purchasers, a lawyer, was present, Duncan gave the deed to that purchaser. Duncan returned to the bank the next day but the officer was out of the bank. On December 7, Duncan went to the bank to negotiate the check but was informed by the bank official that the bank would "keep the rest of it." On the same date, after a call from Duncan's attorney, the bank officer opened the disputed savings account in the bank, designated "Claiborne County Bank for David and Wanda Duncan", in the amount of $24,404.49, which was the equity the Duncans had in the Barren Creek property. Apparently, the bank did not process the check until December 10. This action was filed by the Duncans on December 17, 1984, to recover the moneys in the savings account.

The parties place considerable emphasis on the issue of whether the so-called "dragnet clause" contained in the trust deed served as additional security for David Duncan's business debts. Tennessee has long recognized the general validity of "dragnet clauses" in trust deeds. Wright v. Lincoln County Bank, 465 S.W.2d 877 (Tenn.1970); Atwood v. Brown & Dillon, 1 Tenn.Cas. (Shann.) 639 (1876); Goodfriend v. United American Bank, 637 S.W.2d 870 (Tenn.App.1982); Murdock Acceptance Corp. v. Jones, 50 Tenn.App. 431, 362 S.W.2d 266 (1961). The issue, however, is moot, since the evidence does not establish reliance by the bank upon this security in the transaction before the court. Moreover, it satisfied the note secured by the trust deed on its own initiative and there is no evidence the bank has refused to release the trust deed. The evidence establishes that Duncan delivered the warranty deed to one of the purchasers who, in turn, returned the deed to the bank to be notarized and the deed was recorded in the Register of Deeds Office on December 7. In his testimony, the loan officer explained the basis for withholding the Duncan's equity, which he had planned from the inception of his negotiations with the Duncans for the sale:

Q. You had in mind then that you were going after the equity?

A. Through the right of set-off, ² yes.

The issue thus becomes the extent the bank may exercise its right to set-off under David Duncan's personal guarantees. ³ The evidence adduced at trial does not focus on the transaction involving the cashier's check. David Duncan's testimony indicates h...