MORTGAGES; FORECLOSURE; FUTURE ADVANCES; PROTECTION OF SECURITY:
A lender who forecloses on a deed of trust is secured not only as to the amount
of debt secured by its original deed of trust, but also for amounts advanced by
such lender to pay off debts secured by a prior deed of trust, notwithstanding
the existence of a recording tax requirement..
Higdon v. Regions Bank, ___ S.W.3d ___ (Tenn. Ct. App. 2010). (Another
aspect of this case will be the subject of tomorrow's DD)
Stinnetts financed their purchase of the Property it through a secured loan from
Bank, which recorded a deed of trust against the Property. In April 1998, the
Stinnetts refinanced the Property with a loan obtained from ORNL, and the Bank
deed of trust was released. On September 9, 1999, Weather Tamer advanced
additional money to the Stinnetts, secured by a deed of trust which was
subsequently assigned to KeyBank USA, N.A. Finally, on September 20, 1999, the
Stinnetts obtained another loan from ENM, Inc. Such loan was secured by a third
deed of trust which was subsequently assigned to Regions Bank
Elmer F. Pierson Professorship and Professor of Law; B.A. (Yale
University); J.D. (University of California, Berkeley)
While the Regions deed of trust was executed after the KeyBank deed of trust,
Regions recorded its deed of trust prior to KeyBank, thereby making the Regions
lien prior to the KeyBank lien.
In August 2001, Regions satisfied the debt secured by the ORNL deed of trust in
order to stop an impending foreclosure sale. The Stinnetts filed a Chapter 13
bankruptcy petition in 2001, and the Property was subsequently sold to Jon
Higdon at a foreclosure auction conducted on behalf of KeyBank on November 8,
2007. Prior to purchasing the Property, Higdon did not contact the Stinnetts or
Regions Bank to ascertain the payoff amount of the Regions loan. After Higdon
took title to the Property, Regions notified Higdon's attorney that Higdon's
failure to resolve the deed of trust default would result in the acceleration of
the mortgage debt. The default was not cured and Regions accelerated the deed of
trust on April 6, 2008.
Higdon filed a complaint requesting an injunction against Regions prohibiting it
from completing the foreclosure sale until the amount secured by the Regions
deed of trust was judicially determined, which the court issued. In Regions'
answer, it asserted a security interest in the rents generated by the Property
and claimed its deed of trust secured not only its original debt (plus interest
and costs), but also the amount Regions advanced for the payoff of the ORNL
debt. The trial court found that the amount secured by the Regions deed of trust
included the amount advanced to ORNL. Higdon appealed to Tennessee Court
On appeal, Higdon argued that Regions' claim was limited to the indebtedness
amount on which it paid recordation tax, and that he was not liable for rent
payments made to him because of his absence of contractual privity with Regions.
Therefore, the issues addressed by the court were (1) whether Regions was
secured for the amount of its original debt plus the amount of indebtedness paid
by Regions to release the ORNL deed of trust, and (2) whether Higdon was liable
to Regions for payment of rent pursuant to the Regions deed of trust, despite
the fact that Higdon was not a party to such instrument.
Regarding the amount of the debt secured by the Regions deed of trust, the court
noted that Higdon's primary argument relied on precedent established prior to
the Tennessee legislation's amendments of the statutes requiring the payment of
mortgage registration tax. Prior to such amendments in 1987, Tennessee courts
had held that "any indebtedness beyond the amount for which mortgage
recording tax was paid constituted a nullity." Therefore, prior to 1987,
lenders' security would be limited to the amount of principal indebtedness
recorded in their deed of trust, and any protective advances made by a lender
would not "relate back to the time of the original loan as to give it
priority." However, subsequent to the 1987 amendments, the statutes
provided in part that "[n]onpayment or underpayment of tax on an
indebtedness . . . shall not affect or impair the effectiveness, validity,
priority, or enforceability of the security interest or lien created or
evidenced by the instrument, it b
eing declared the legislative intent that the effectiveness, validity, priority,
and enforceability of security interests and liens are governed solely by law
applicable to security interests and liens."
The legislative amendments, coupled with the fact that the Regions deed of trust
included a future advances clause providing that the deed of trust would also
secure "the payment of all other sums, with interest thereon, advanced in
accordance herewith to protect the security of this Deed of Trust,"
resulted in the court holding that Regions' payment of the ORNL deed of trust to
prevent a foreclosure sale "was secured by the future advances clause in
[Regions'] original Deed of Trust" and the trial court "did not err in
holding that [Regions] was secured for the amount of its original debt in
addition to the amount of indebtedness paid by Regions Bank to release a prior
deed of trust."
Comment: Note that the Regions apparently paid off the ORNL subsequent to the
creation of the lien under which Mr. Higdon purchased. Undoubtedly, by the
time Regions mad such payment, it was aware of the KeyBank mortgage. Why
wasn't this payoff deemed an "optional advance" and therefore in
junior priority to Mr. Higdon? Tennessee apparently has abandoned the
"optional/obligatory" test by statute and now permits future advance
clauses to enjoy the priority of the date of their creation and recording
regardless of the fact that they might constitute "optional advances."
This approach, generally, is also that taken by the new Restatement of