JPMorgan Chase Bank, N.A. v. Fifth Third Bank, N.A., 010407 FED6, 06-5012

Docket Nº:06-5012
Party Name:JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as Trustee, Plaintiff-Appellant, v. FIFTH THIRD BANK, N.A., Defendant-Appellee.
Case Date:January 04, 2007
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as Trustee, Plaintiff-Appellant,

v.

FIFTH THIRD BANK, N.A., Defendant-Appellee.

No. 06-5012

United States Court of Appeals, Sixth Circuit

January 4, 2007

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE

BEFORE: NORRIS, COLE, and COOK, Circuit Judges.

OPINION

ALAN E. NORRIS, Circuit Judge.

This diversity action involves a dispute between two banks: Franklin National Bank ("FNB")1 and JPMorgan Chase Bank, National Association ("Chase"). Each bank made loans to Michael E. Redick, who sought funding for his new business, Fan-A-Mania Sports, Inc. Unfortunately for all involved, the business did not thrive. Because both banks hold a deed of trust securing the loans with the same piece of real property, we must decide which takes priority.

The district court determined that the deed of trust held by FNB, which was recorded first, took priority because it included a provision for future obligatory advances and, pursuant to Tennessee law, was not released even though the outstanding balance on the promissory note secured by FNB's deed of trust was paid in full at the time Redick entered into a subsequent deed of trust with Chase. Accordingly, it granted summary judgment to FNB. Because we conclude that the deed of trust held by FNB provided for optional rather than obligatory advances and that FNB had "actual notice" of Chase's intervening deed of trust at the time that it authorized further advances or loans to Redick, we vacate the judgment of the district court and remand this matter with instructions that Fifth Third release the deed of trust secured by the disputed property.

I.

It would be an understatement to say that this case illustrates how not to enter into commercial transactions. At virtually every turn, representatives of both parties made business decisions based upon an incomplete understanding of the factual and legal landscape, failed to follow up when confronted by information that should have raised concerns, and generally proceeded based upon assumptions that proved to be misguided. However, because our holding is grounded on the language of the deeds of trust and their accompanying promissory notes rather than upon the circumstances surrounding their negotiation, a lengthy factual recitation is unnecessary. As always, we review grants of summary judgment de novo. Bender v. Hecht's Dep't Stores, 455 F.3d 612, 619 (6th Cir. 2006).

Redick founded Fan-A-Mania, which sold sports-related items, in January 2002. On March 5, 2002, he signed a "Deed of Trust for Commercial Purposes" in favor of FNB as beneficiary with John T. Flaugher serving as trustee. It was recorded in Williamson County two days later. The deed of trust explicitly states that it "SECURES OBLIGATORY ADVANCES MADE FOR COMMERCIAL PURPOSES"; this statement is underscored in the following paragraph:

12. Future Advances. Upon request of Borrower(s), Lender, prior to release of this Deed of Trust, may make future advances to Borrower(s) . . . up to the original amount of the Note or the maximum amount secured hereby, whichever is greater. Such future advances, with interest thereon, shall be secured by this Deed of Trust unless the parties shall agree otherwise in writing.

The deed of trust also adopted the definition of "obligatory advances" found in Tenn. Code Ann. § 47-28-101. As collateral, Redick offered his unencumbered home at 227 Lancelot Lane in Franklin, Tennessee.

In addition to the deed of trust, Redick signed a related promissory note in the amount of $125,000 that was a "working capital line of credit for seasonal business." It provided for interest-only payments beginning on April 5, 2002 and a final payment of the entire amount of principal plus accrued interest by March 5, 2003. Redick borrowed the entire $125,000 for inventory.

Redick had assured the FNB loan officer who approved the loan that the note would be paid off by a private loan from his brother. However, his brother did not follow through and therefore Redick decided to sell his house for $280,000 and use part of the proceeds to repay FNB the outstanding balance of $125,000.

On the day his house was due to sell, the buyer backed out. However, Redick had already signed a contract to buy another house at 202 Golden Leaf Court in Franklin. His mortgage broker arranged financing for him through...

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