In re Lemka, Bankruptcy No. 96-20502.
| Decision Date | 26 September 1996 |
| Docket Number | Bankruptcy No. 96-20502. |
| Citation | 201 BR 765 |
| Parties | In re Eddie W. LEMKA and Melanie J. Lemka a/k/a Melanie J. Seay, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
Alan C. Lee, Morristown, TN, for Eddie W. Lemka and Melanie J. Lemka.
H. Scott Reams, Taylor, Reams, Tilson & Harrison, Morristown, TN, for Jefferson Federal Savings and Loan Association.
This case is before the court on the objection by Jefferson Federal Savings and Loan Association ("Jefferson Federal") to confirmation of debtors' proposed chapter 13 plan. At issue is whether certain real property owned and conveyed in trust by Margaret Lemka as security for a promissory note executed by her and the debtors, Eddie and Melanie Lemka, in favor of Jefferson Federal on March 3, 1995, is also security for a subsequent loan made to the debtors alone by Jefferson Federal on March 5, 1996. As discussed below, the court finds that the loan of March 5, 1996, is not secured by Margaret Lemka's real property and accordingly, overrules Jefferson Federal's objection to confirmation. The following constitutes the court's findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a), as incorporated by Fed.R.Bankr.P. 7052. This is a core proceeding. 28 U.S.C. § 157(b)(2)(L).
The pertinent facts along with the two promissory notes and the deed of trust in question have been stipulated by the parties in a joint pretrial statement. Those stipulations establish that on March 3, 1995, the debtors and Margaret Lemka, the mother of Eddie Lemka, executed an adjustable rate promissory note to Jefferson Federal in the amount of $57,500.00, to be repaid in 300 monthly installments, in the unadjusted initial amount of $492.42. As security for the loan, the debtors and Margaret Lemka executed that same day a deed of trust in favor of Jefferson Federal conveying in trust the debtors' real property and Margaret Lemka's real property, consisting of the debtors' residence and the residence of Margaret Lemka, respectively.
A year later on March 5, 1996, the debtors alone executed a promissory note in favor of Jefferson Federal in the amount of $18,392.29. That note states on its face that it is secured by liens against the titles of three motor vehicles owned by the debtors, a 1985 Chevrolet pickup, a 1992 Chevrolet Cavalier and a 1982 Chevrolet Camaro. The note further provides that "collateral securing other loans with Jefferson Federal may also secure this loan."
The debtors filed the petition initiating this chapter 13 case on March 14, 1996. On April 10, 1996, Jefferson Federal filed two proofs of claims, one in the amount of $57,973.32 for the loan of March 3, 1995, and the other in the amount of $18,692.29 for the subsequent loan of March 5, 1996. The plan as presently proposed by the debtors treats the March 3, 1995 loan as fully secured, with Jefferson Federal to be paid its monthly maintenance payment of $492.42 and the arrearage thereon of $1,141.00 in monthly payments of $30.00 without interest. As for the loan of March 5, 1996, the debtors propose to pay Jefferson Federal the value of the vehicles, $9,800.00, plus ten percent interest in monthly payments of $210.00, with the balance of the claim in the amount of $8,892.29 to be paid as unsecured.
Jefferson Federal has not objected to the debtors' proposed treatment of its claim arising out of the March 3, 1995 loan, nor does it dispute the valuation of the vehicles pledged in the March 5, 1996 note. Jefferson Federal contends, however, that this second loan is secured not only by the vehicles, but also by the parcels of real property pledged by the debtors and Margaret Lemka in the earlier loan and that, therefore, it is not being paid the value of its allowed secured claim as required by 11 U.S.C. § 1325(a)(5).1 Jefferson Federal's position is based on a "dragnet" or "other indebtedness" provision in the deed of trust which states that, in addition to securing the March 3, 1995 note, the deed of trust is made "TO SECURE to Lender . . . (c) the repayment of any other sum owing from Borrower to Lender, whether presently owing, or hereafter incurred."2
The parties agree that the real property owned and pledged by the debtors in the deed of trust is not sufficient to secure both the March 3, 1995 note and the balance of the March 5, 1996 loan. However, there is sufficient equity in the real property owned by Margaret Lemka to render Jefferson Federal fully secured if the deed of trust collateralizes the March 5, 1996 loan to the debtors. It is the position of the debtors that Margaret Lemka's real property does not secure this loan because Margaret Lemka never consented to allowing her residence to be collateral for the loan of March 5, 1996. The debtors note that, unlike the loan of March 3, 1995, Margaret Lemka did not execute the March 5, 1996 note as a borrower, nor did she execute a continuing guaranty which the debtors contend is required by TENN.CODE ANN. § 47-12-107.3 Jefferson Federal responds that consent was given by Margaret Lemka in the deed of trust pursuant to the document's dragnet clause and that execution of a continuing guaranty as contemplated by TENN.CODE ANN. § 47-12-107 is not necessary because Jefferson Federal does not seek to hold Margaret Lemka personally liable for the March 5, 1996 loan to the debtors, only a determination that her real property is collateral for this debt.
The parties have requested that the court rule on these issues based on the stipulations of fact submitted to the court by the parties. There is no dispute as to the validity of the documents in question which consist of the two promissory notes and deed of trust, and the parties agree that the deed of trust is a valid lien against the real property described therein.
Dragnet clauses have long been recognized and enforced by Tennessee courts according to their terms. See Willie v. First American National Bank (In re Willie), 157 B.R. 623, 625-26 (Bankr.M.D.Tenn.1993); Rogers v. First Tennessee Bank, N.A., 738 S.W.2d 635, 636-37 (Tenn.App.1987); Duncan v. Claiborne County Bank, 705 S.W.2d 663, 664-65 (Tenn.App.1985). In 1983, the Tennessee legislature endorsed the use of such clauses in debt instruments by the enactment of TENN.CODE ANN. § 47-50-112(b), which provides the following:
Any contract, security agreement, note, deed of trust, or other security instrument, in writing and signed or endorsed by the party to be bound, that provides that the security interest granted therein also secures other indebtedness, be it unsecured, commercial, credit card, or consumer indebtedness, shall be deemed to evidence the true intentions of the parties, and shall be enforced as written; provided, that nothing herein shall limit the right of any party to contest the agreement on the basis that it was procured by fraud or limit the right of any party to assert any other rights or defense provided by common law or statutory law in regard to contracts.
See In re Willie, 157 B.R. at 625.
The focus of reported decisions by the Tennessee courts is whether the language contained in the dragnet clause is plain and unambiguous such that a layperson could comprehend its meaning. See In re Willie, 157 B.R. at 626, citing Murdock Acceptance Corp. v. Jones, 50 Tenn.App. 431, 362 S.W.2d 266, 270 (1961); Wright v. Lincoln County Bank, 62 Tenn.App. 560, 465 S.W.2d 877, 880 (1970); Johnson v. Midland Bank & Trust Co., 715 S.W.2d 607, 612 (Tenn.App.1986); and Rogers, 738 S.W.2d at 636-37. If the language is plain and unambiguous, a court must consider the intention of the parties to a deed of trust to be what the plain language therein declares it to be. See Midland Bank & Trust Co., 715 S.W.2d at 611-12, quoting Lincoln County Bank, 465 S.W.2d at 880-81.
The relevant language of the deed of trust in the present case states as follows:
TO SECURE to Lender (a) the repayment of the indebtedness evidenced by Borrower\'s note dated 3-3-95 (herein "Note"), in the principal sum of $57,500.00, with interest thereon, providing for monthly installments of principal and interest, with the balance of the indebtedness, if not sooner paid, due and payable on 3-1-2020; the payment of all other sums, with interest thereon, advanced in accordance herewith to protect the security of this Deed of Trust; and the performance of the covenants and agreements of Borrower herein contained; and (b) the repayment of any future advances, with interest thereon, made to Borrower by Lender pursuant to paragraph 21 (herein "Future Advances") of the Master Form Deed of Trust incorporated herein; and (c) the repayment of any other sum owing from Borrower to Lender, whether presently owing, or hereafter incurred.
Subsection (c) of this paragraph clearly provides that the deed of trust secures not only the note executed by the parties in connection therewith, but any other sums owed by "Borrower to Lender," now or in the future. The critical determination for this court is: who is the "Borrower"? Is each of the three individuals who signed the note and deed of trust a "Borrower" such that a future loan to just one or two of the three is secured by the dragnet clause? Or does "Borrower" refer to the three individuals collectively, as a unit, such that only future loans incurred by all three persons together fall within the parameters of the dragnet provision?
The only definition of "Borrower" found in the deed of trust is that set forth in the opening paragraph which provides as follows:
THIS DEED OF TRUST is made this 3rd day of March, 1995, among the Grantor, EDDIE W. LEMKA and wife, MELANIE J. LEMKA and MARGARET LEMKA, Single (herein "Borrower"), DAVID M. TILSON of Hamblen County, Tennessee, (herein "Trustee"), and the Beneficiary, JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION, a corporation organized and existing under the laws of Tennessee, whose address is 219...
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