# FILED
March 29, 1999 Cecil Crowson, Jr. Appellate Cou rt Clerk IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

______________________________________________ CITIZENS TRI-COUNTY BANK, FROM THE GRUNDY CHANCERY COURT, No. 5352 Intervening Plaintiff-Appellee, THE HONORABLE BUDDY D. PERRY, CHANCELLOR Vs. C.A. No. 01A01-9805-CV-00259 GEORGIA MUTUAL INSURANCE CO., Defendant-App

ellant. Lex A. Coleman; Ruth, McCarthy & Coleman, P.C. of Chattanooga For Defendant-Appellant REVERSED AND DISMISSED L. Thomas Austin of Dunlap For Plaintiff-Appellee

____ _______________________________________________________________________ _ TOMLIN, Sp. J.

This case began as a

breach of contr

act action filed b

y David and Darle

ne C rabtree (“Crabtrees”), the named insureds under an ins urance policy issued by Georgia Mutual Insurance Company (“Georgia Mutua l”) insuring the Cr

abtrees’ home a

gainst loss or damage by fire, as wellas the producing agent, Johnny Hendrix (“Hendrix”) in the Circuit Court of Grundy County. Georgia Mutual filed an answer, along with a motion for summary judgment. Later, during the pendency of a similar suit fil ed in federal co

urt, Citizens Tri-County

Bank (“Citizens”

) filed its motion to intervene in the case un de r consideration. Following the entry of an order in the federal court case whereby that court declined to

exercise subject matter jurisdiction, an order permitting Citizens to intervene in the Grundy County case was entered. S ubsequently, the trial court in t he case herein

under considera

tion, grante

d summar y judgmentin favor of Geor gia Mutual and Hendrix, holding that the Crabtrees were not entitled to any of the insurance proceeds on the ground of misrepresentations. The order granting such relief was made final as a result of an unappealed from order entered by the Middle Section of this Court in January, 1998, dismissing the appeal for failure to prosecute. Prior to the judgment bein

g entered in the tr

ial court, Citizen

s, now a co-plaintiff, filed

a motion for summary j udgment against Georgia M utual. Georgia Mu tual filed a respo

nse the reto, along with a cross-motion for summary judgment against Citizens. Following o ra l arguments

on the cross-motion for summary judgment, the trial court denied Citizens’s bad

faith claim and entered

summary judgment in favor of Citizens against Georgia Mutual on all of the2

issues, awarding Citizens a judgment in the amount of $14,463.90. This appeal followed. On appeal, Georgia

Mutual has raised

what it contends to be four issues, but are instead the assertion and statement of what it concludes to be four statements of the law that should have been adopted by the t

rial court. As this Court views it, th e real issue pre

sented on appeal

is whether or not th e trial cour t erred in granting summary judgment in favor of Citizens and declining to grant summary judgment in fav or of Georgia Mutual. We are of the opinion that the trial court did err and that it should have awarded summary judgment in favor of Geor gia Mutual against Citizens. A ccordingly, we r

everse the acti

o n of the court and enter summary judgment in favor o

f Georgia Mutual. In dealing with an appeal f rom the entry of summary judgment in the trial court, the responsibility

of this Court is to dete rmine whether or

not the requireme

nts o f R ule 56, Tenn.R.Civ.P., have been met. Cowden v. Sovran Bank/Ce ntral South , 816 S.W.2d 741, 744 (Tenn. 1991). In ruling ona motion for summary judgment, the appellate courts, like the trial courts, must review the matter in a light most

favorable toward the nonmoving party and draw all legitimate conclusions of fact in his favor, thereafter finding that the moving party is entitled to a judgment as a matter of law. Rule 56.03, Tenn.R.Civ.P. Byrd v. Hall, 847 S.W.2d 208, 210 (Tenn. 1993). No presu mp tion of correctness attaches to the trial court’s order granting summary judgment. The task of this Court is confined to a review of the recor d to ascer tain whether or not the requirements of summary judgment have been met. Carvill v. Bottoms , 900 S.W.2d 23, 26 (Tenn. 1995). As we consider the correctness of the summary judgment motion made by each of the parties, we must view the evidence presented in a light most

favorable to the nonmovant. Byrd v. Hall, 847 S.W.2d at 211. Bothparties herein h

ave agreed on th

e material fact

s . Therefor e, it becomes our responsibility

to consider these facts in light of the applicable

law to ascertain

whether the trial court was in error in granting summary judgment to Citizen s and at the sa me time in denying Georgia Mutual’s summary judgment motion. We will consider only those admitted facts that

are releva nt to this i ssue. Appellant, in its brief and argument, attempts to have this Court establish some new law as it r

elates to the duty a

nd responsibility of

a lender. Inasmu

ch as this

case could really be disposed of on the summary judgment issue pertaining to existing law, we decline.3 The Crabtrees applied for and obtained a home loan from the Palmer branch of Sovran Bank. The loan was to be secured by a first deed of trust on their property. Under the terms of this deed of trust, they were required to procure insura

nce on their

home, insuring the p

roperty from damage or loss by fire or other hazards. The deed of trust also required that the insurance policy included a provision naming Sovran as the “mortgage loss payee.” The Crabtrees applied for this ins urance with Geo

rgia Mutual throug

h the John Hendrix agency. The Crabtrees failed to disclose on the application for insurance that they had sustained

a previous fire loss of a substantial nature some six years earlier, and that they had had several prior insurance cance llations, declinations and n onrenewals. Bein

g unaware of the

se facts, Georgia Mutual issued on e of its homeowners i nsurance policie

s to the Crabtrees

in August, 1991, for a period of one year. The declaration page of the policy named Sovran as mortgagee. The policy also

contained a standard Union Mortgage clause wherein Sovran was named as the mortgage loss payee. This policy was renewed by Georgia Mutual in August of 1992 for an additional one-year period. Some time between June 1991 and J anuary 15, 1992, NationsBank (“Nations”) purc hase d the Palmer

branch of Sovran, along with a loan portfolio that contained the Crabtrees’ mortgage. By letter dated February 22, 1993, Nations notified Georgia Mutual that it was to be shown as the mortgage loss paye

e on the Crabtree

s’ policy and requ

ested that Georg

ia Mu tual alter i ts records to show this fact. U pon receipt of thi

s not ice, the mortgagee designation on the Crabtrees’ policy was change d from Sovran to

Nations. Nations remained on the policy as the named mortgagee until the coverage term expired on August 7, 1993. On or about

January 15, 1992, Citizens and Nations were involved in negotiations for the purchase by Citizens of Nations branch offices in Palmer, Al ta mont and Tracy City. Citizens also purchased portions of the loan portfolios of each of these branches, after it had had an opportunity

to examine the loan portfolios and select the loan s it wished to purchase. The Crabtrees’ loan was among those purchased by Citizens, which began servicing the loan or about August 14, 1992. It is undisputed that Citizens took no steps to notify Georgia Mutual after purchasing the branchbank and this loan to designate it as the mortgagee loss payee. On August 5, 1993, the Cr abtrees’ home and contents were completely destroyed by fire. The following day th e4

Crabtrees reported the loss to Hendrix

which prepared a property loss notice. That notice named Nations, n ot Cit izens, as the mortgagee loss payee. A few months thereafter, the Crabtrees submitted a sworn proof of loss in the amount of $64,590.00. Georgia Mutual denied Cra

btrees’ claim an

d filed suit

for declaratoryrelief against bo th the Crabtrees and Citizens in the U.S. District Court for the Eastern District

of Tennessee. As previously

noted, this

suit was ultimately dismissed. At about the same time, the Crabtrees had filed the present suit for breach of contract naming both Georgia Mutua

l and agent Hendr

ix as defendants. Thereafter , Citizens filed a motion to intervene as plaintiffs, which was granted. The trial court granted Ge orgia Mutual and H

endrix’s motions fo

r summary judgment a

s t o Crabtrees’s comp laint, f inding that the Crab

trees had made mi

srepresentatio

ns in their ap plication. This order was ma de final under Rul

e 54.02 Tenn.R.Civ.P. Thereafter, Ci tizen s filed its motion for summary judgme nt as well against G

eorgia Mutual and

Hendrix. Georgi

a Mutual also filed its motion for summary judgment against Citizens. Following a hearing, the trial court granted Citi

zens a summary jud

gment on all c

laims e xcept the bad faith claim and deniedGeorgia Mutual’s motion for summary judgment as to all claims except that of bad faith.

A mortgagee has a

n in surable interest in the mortgage property. Furthermore, the mortgagee’s rights under an insuran ce policy are ge

nerally fixed at

the time of the loss

and are based on the mortgagee’s interest in the property. First Investment Co. v. Allstate Insurance Co. , 917 S.W.2d 229, 231 (Tenn. App. 1994). The deed of trust

between the Crab

trees and Sovran

stated in pertinen

t part as follows: Sovran. Insurance Grantors shall keep the improvements now existing or hereinafter locatedon the Property insu red for the full in

surable value ag

ainst loss by fire and all hazards included within the term “extende d coverage,” and against such other losses asLender may require. All ins urance policies required pursuant to the preceding sentence shallinclude a standard provision, satisfactory to Lender naming Lender as a Mortgage Loss Payee. The policy contained a standard union mortgage clause, which named Sov ran as loss payee. The polic

y stated in releva

nt part: 12. Mortgage Cla

use

. . . If a mortgagee is named in this policy, any lo ss payable under coverage A or B woul d be paid to the mortgagee and _______ as interest ________.5 T.C.A. § 56-7-804 ( 1925) provides in p art as follows: Whenever

any person shall . . . as mortgagee . . . possess or have any fire insurance

policy on realty ma

de payable

to such person, or other person as that person’s interest may appear, then such insurance as to the interest of the . . . mortgagee . . . t herein name d shall not be invalidated by an act or neglect of the mortgagor owner of the property so insured . . . . The courts in

this state have long recognized that a standard union mortgage clause under § 56-7-804 creates a separate and distinct contract between the mor tg agee and the insurance company. Phoenix Mutual Life Ins. Co. v. Aetna Ins. Co. , 59 S.W.2d 517 (Tenn. 1933). There has developed

a body of law in man

y jurisdictions so

as to create a general rule that

a mortgagee or lien holder has no claim to the proceeds of a fire insu rance policy unless the mortgagee or the lien holder has been named th

e mortgagee l oss payee or the policy has otherwise been assigned to the mortgagee loss payee. In John Weis, Inc v. Reed , 118 S.W.2d 67 7 (Tenn. App. 1938), the facts were these: Reed, the mortgagor, had suffered a fire loss and was entitled to the proceeds to be paid by the insurer. Weis wa

s a mortgagee as to certain fixtures and equipment sold to Reed, and thereby claimedthe right to the proceeds of the fire insurance policy. This Court held that w hile Weis

was entitled to a judgment against Reed, it received no lien on the proceeds to the policy. The court noted: It

is, undoubtedly, the

general rule

that a mortgagee or

the holder of a co nditional sales co

ntract has no righ

t to the benefits o

f a policy taken by the mortga gor, unless it is

assigned to

him. The contract of insurance is pu

rely a personal c

ontract betwee n the assuredand the insurancecompany. the contract does not attach to or run with the title to the insure d’s property, and it is well settled that the mortgagee is not entitled to the insurancemoney in the absence of an agreemen t on the part of the

mortgagor to insure the property for the benefit of the mortgagee. Id. at 682. In Western Express, Inc. v. Interested Underwriters atLloyd’s, London, 942 S.W.2d 542 (Tenn. App. 1996), this Court faced a situation where a lienholder of personal pro perty soughtto have its name ad ded as a party in a

suit to enforce thepayment of insura nce proceeds. In this case, the lienholder had not been listed on the policy. The trial court denied lienholder’s motion to be added as a pa rty, and on appea

l this Court aff

irmed, noting that because the lienholder

was not listed on the policy as the loss payee, the insurance company had no notice6

of his interest. In Cowles v. St. Paul Fire & Marine Ins. Co., et al , 1987 WL 25381 (Tenn. App. W.S. Dec. 4, 1987), mortgagor borrowed $60,000.00 from First Citizens National Bank of Dyersburg (“First Citizens”) to purchase a nightclub in Martin, Tennessee. Mor tga gor signed a note and security agreement which required him to secure and maintain adequate fire insurance cove rage

on the building and at the same time naming First Citizens as a mortgagee l oss payee. At the time of the sale, the nightclub was insured by another company. On the day of the sale, sellers calledthe company’s local agent and instructed him to show m or tgagor as the new named insured. When the mo

rtgagor re newed the policy, the renewal ce

rtificate did not n

ame First Citizens as loss payee or as mortgageholder. The proof was in conflict as to whether the seller had requested the agent

to so name

First Citizens. Afte

r the nightclub wa

s destroyed by fir

e, it

was discovered that First Citizens had not be en named as loss payee under the policy. The insurer refused to pay the

mortgagor. First Citi

z ens ultimat ely sued the prev ious insurer to

recover the proceeds. This Court found in favor of defe

ndants, stating in pa

rt in its Opinion as follows: [i]f

the insurer does not

have notice or knowledge of the existence of the mortgagee’ s eq uitable lien on the proceeds it cannot be sued by th e mort gagee for the proceeds, nor held liable to the mortgagee after having paid the proceeds to the insured. In this conne ction the mere fact that the insurer has knowledge of th e existence of the mortgage does not charge it with notice or constitute knowledge of the existence of an equitable lien. Id. at *2. In the c a se before us, while Citizens argues that Georgia Mutual or its agent, Hendrix, had knowledge that Citi

zens had assumed

Crabtrees’ loan

, there is no evide

nce in the record of that fact. T. C.A. § 56- 7-804, the mortgage clause contained in Georgia Mutual’s policy and the

cases cited above, are consistent in providing protection for the loss payee actually named in the insurance policy. In the absence of being so named, generally speaking protection is provided to a mortgagee loss payee where the insurance policy h as been validl y assigned. In the case under consideration, Citizens argues that while it is not th e named payee, it is nonetheless the assignee of NationsBank, the named mortgage loss payee, and a s such steps into the shoes of NationsBank. There is nothing in the record, however, of

the various terms and conditions of7

the contract betwe

en Citizens where

by Citizens a

cquir ed, among other th

ings, the Crabtree

s’ note. We have only the assertion by Citizens that it bought the note. Stated another way, there is nothing in

the record to supp

ort Citizens’ clai

m that it is the assigne

e of NationsBank’ s interest in the Crabtrees’ mortgage , which w ould include the ri ght to be named as th

e mortgagee loss payee under Georgia Mutual’s policy. Georgia Mutual’s

policy contained t

he following provi

sion relating to ass

ignments: SECTION II - CONDITIONS

* * * 7. Assi gnment . Assignment of this p olicy will not be val

i d unless we give our

written consent. While not directly on poin

t, the case of Zaharias v. Vassis , 789 S.W.2d 906 (Tenn. App. 1989), is quite compelling. Zaharias was the second mortgagee secured by per so nal property and equipment

in a restaurant. He was also named as the second mortgagee in the insurance policy putinto effect by the own e r. The property herein referred to burned. The insurance paid the stated amount of the policy to the first mortga gee for the loss of

the building but ref

used topay Zaharias for the loss of his personal property collateral on the grounds that he was named as a “mortgagee” and not as a “ loss payee” which would have been required in order to secure an interest in the pe rsonal property proceeds. The trial court found in favor of Zaharias, and the insurance company appealed. On appeal, this Court reversed the trial court, finding that there

w as no doubt that both the mortgagor and the

mortgagee intend

ed for Zaharia

s be protecte

d under the insurance policy. However, we stated:

However, it is as equally free from doubt that their

mutual intent was never communicated to the insurer. The insurer was told

only that Zaharias occupied the

status of mortgage

e, with no mention of the fact that Zaharias held an interest in the personal property. While it must be concede

d that personal pr

operty may be th

e subject of a mortgage, the proof in the recor d is that in the insurance industry the term “mortgagee” applies o nly to real property and the term “loss paye e” is use d in regard to another who has an interest in personal property. Id. at 908. Thereafter, this Court concluded: The questi on then arises as whether, after loss, one claiming an interest in th e proceeds, either on contract principles (that is, a contract between the cla

imant and th

e insured) or on eq

uitable principles,may bring suit to recover the insured’s interest in the8 proceeds before it is paid to the insured. We know of no law that wo uld prev ent such a claim. However, in such case, the claimant’s right to recover is based upon the insured’s right and can rise no higher. (Citations omitted). Id. at 910. For all these reason

s, this Court is of the opinion that if there had been an assignment of the insurance policy by Nations to Citizens, under the express terms of that insurance policy, any assignment

by Nations to Citizens would be void due to an absence of consent to the assignment by Georgia Mutual. Furthermore, even in the absen ce of an assignme

nt, Citizens would

not be entitled to the proceeds. In the absence of being named as a mortgagee loss payee, or in the absence of a valid assignment of the policy, Citizens’ right to recover is based solely in e

quity upon the insured’s right to recover, and can rise no higher. Zaharias , 789 S.W.2d at 910. In June 1997, the trial court in this case entered an order granting summary judgment in favor of Georgia Mutual and against the Crabtrees as to th

e Crabtrees’ cl

aim to the proceeds of the policy, ruling that in their appl ication forinsurance the Crabtrees had made material misrepresentations as to any prior fire losses. That

judgment was appe

aled from, dismissed by this Court, and has lo

ng since become f

inal. In sum, Citizens in no wa y can be found to be

entitled to the proc

eeds of Georgia Mutual’s policy. It has no cl aim as a mortgagee loss payee because of its failure to be named

as such in the policy. Any claim based upon the theory of an assignment is vo id due to the absence of Georgia Mutual’s consent. Inasmuch as the insureds have been held to have no right to recover the proceeds, Citizens may not prevail under equitable principles. Accordingly, the judgment of t he trial court granting summary judgment in favor of Citizens on all claims exce pt th e bad faith c laim, is reversed. The judgment of the trial court denying Georgia Mutual’s motion for summary judgment as to all claims other than that for bad faith is also reversed. The monetary judgment entered by the trial court in favor o f Citizens against Georgia Mutual in t

he amount of $14,46

3.90 is reversed. Georgia Mutual’s motion for summary judgment as to Citizens is hereby gra n ted, and Citizens suit against Georgia Mutual

as intervening plain

tiff is hereby dism

issed. Costs in this ca

use on appeal are taxed to Citizens for which execution may issue, if necessary.

_________________________________ HEWITT P. TOMLIN, JR.9 SPECIAL JUDGE

CONCUR:

____________________________________ W. FRANK CRAWFORD, PRESIDING JUDGE, W.S.

____________________________________ DAVID R. FARMER,

JUDGE