### IN THE COURT OF APPEALS OF TENNESSEE AT KNOX VILLE A pr il 22, 200 8 S es sio n
WAS HINGT ON MUTUAL BAN K, F.A. V 

### . ORNL FEDERAL C R ED IT UNION, ET A L 

### . Appeal f rom the Chancer y Court for Loud on Coun ty No. 10642 F rank V. Willi am s III, Chan cellor

No. E2007-02421-COA- R3-CVF iled Jun e 24, 2008

I n this appeal, we deter

mine the priority

betwee n two rec orded de eds of trust. Homeow ners enter ed into a line of c redit wi t h a cr ed it union secured by a re corde d deed of

trust on the homeowner s’ home. The homeowner s subsequently ref inance d their home with a ba nk. The ba

nk pa id o ff the ho me ow ne rs ’ d e bt t o th e c re dit un io n, and re c or de d it s o wn de e d o f t ru st s e c ur ingits loan. At that same time, the loa n and deed o f t ru s t wa s assig ned to a se cond bank. D espite the pay off of the hom eowne rs’ debt by the assignor bank, the first deed of trust to the cr edit union was
never rele ased, a

nd the homeowne rs continued to draw on the line of cr edit. When the homeowner s beg an havingfinanc ial problems, the assig nee bank discover ed that the c redit union had ne ver re le a se d it s d e e d o f t

ru st o n th e ho me ow ne rs’ pr op e rt y be c a us e of a pr ov isi on

in t he de e d o f t

ru st stating that its release was c onditioned upon the borrowe r re questing the canc ellation of the line of
cre dit. W hen the homeow ners de faulted on both loans, the que stion arose as to which par ty ’s dee d of tr us t ha d p ri or ity . T he tr ia l c ourt ru le d in fa vo r o f the a ssi g ne e ba

nk on the ba sis that th e c re dit
un ion wa s equ ita

bly e sto pp e d f

ro m a sse rt ingits de e d o f t

ru st b e c a us e , at th e tim e of

pa y of f, the c re dit union did not follow it s self-imposed pra ctice of advis i ng if any

action other

than payoff wa s require d befor e re lease of the de ed of trust. After car eful re view, we reve rse be cause we c onclude that the assig nor bank ha d the means of discoveringthat pay off a lone was insuff icient to trig g er the
re le a se of

the de e d o f t

ru st a nd be c a us e , und e r s ta te statut or

y law, it h ad pri or

no tic e of

a ll prer equisites to relea se the de ed of trust a s a re sult of the cre dit union’s reg istration of such dee d.

Te nn. R . A pp. P . 3 App e al a s o f Rig ht ; J udgm e nt of t he Cha nc e r y C our t R e ve r se d; Ca use Rem anded

S HAR ON G. L EE , J ., delivere d the opinion of the cour t , in which H ER SCH EL P. F RAN KS , P.J ., and C H A RLES D. S US ANO , J R ., J ., joined.

Dan D. Rhe a, Knoxvill e, Te nnessee , for the a ppellant, ORNL

Fe dera l Credit Union.

L inda J . Hamilton Mowles, Knoxvi lle, Tenne ssee, for t he appellee, W ashing ton Mutual Bank, F .A.T he L ock etts s ubse quent ly f ile d a bank ruptc y pe tit ion a

nd w er e g ra

nte d a dis cha rg e of the ir debt s. A lthoug h ini tia lly 1 the y w er e nam ed as de f

enda nts in this c as e, the y

w er e late r di sm is se d f

rom the s uit and ar e not pa

rti es to this a

ppea l.
2 OPINION

I. Backg ro und

I n Apr il o f 2 00 1, Da

vid and Do nn a L oc ke tt b or

ro we d $ 10 0, 00 0 f

ro m O RN LF e de ra l Cr e dit Union (“O RNL ”) unde r a home equity line of credit loan agr eeme nt which was secur ed by a dee d of trust on their L oudon County home. ORNLfiled its deed of trust in May

of 2001 in the off

ice of R e g i s t e r o f D e e d s f o r L o u d o nC o u n t y.

I n Marc h of 2002, the L ocketts r ef i n an ced the ir home with TNB ank. The y signe d a promissory note for $127,000
, secur ed by a deed of trust on the home. After rec eiving a title abstrac t on the p ro p er t y , TNB ank’s title company , J ackson Squar e Title Company (“Jackson Square ”), throug h its ag ent, attorne y Steven Seivers, fax ed ORNLa re quest for a statement of the c urre nt pay off amount for the L ocketts’ de bt to ORNL . ORNL faxed two response s; one perta ining to a loa n d e s ig n a te d “ L o an # 9 5 ” , w it h a s tate d p ay o f

f a mo u n t o f $ 9 8 , 4 1 8

. 4 3 , an d o n e p e rta in in g to a loan d e s ig n a te d “ L o an # 3 9 ” , w it h a s tate d p ay o f

f a mo u n t o f $ 2 , 0 5 0

. A f

te r r e c e iv in g th is information, J ackson Square, on behalf of TNBank, issued two chec ks to ORNLin the stated payoff amounts, but
never reque sted a re lease of ORNL ’s dee d o f t rust. I n response , on Marc h 25, 2002, ORNLsent TNB ank re ceipt vouche rs showing that the l oans had been paid in full. On that same date, TNB ank assig ned the L ocketts’ debt and the dee d of trust to Washington Mutual Ba nk, F.A. ( “Washing ton Mutual”), a

nd on April 3, 2002, a de ed of trust and assig nment of same to Washing ton Mutual was
r e c o r d e d w i t h t h e R e g i s t e r

o f D e e d s f o r L o u d o nC o un t y. Unbeknownst to Jackson Square, TN Ba n k , and Washing ton Mutual, after rec eiving the monies paying of

f the L ocketts’ debt, ORNLdid not relea se its deed of trust on the L ocketts’ home, and the home e quity

line of cre dit with ORNL rema ined open a nd available to the L ocketts. Taking
a dv anta g e of thi s so ur c e of fu nd ing , be tw e e n Ap ri l 18 , 20 02 , and Janu ary 22 , 20 04 , t he L ock etts borrowe d an additional $95 , 8 8 7 .87 from ORNL . Subsequently , J ackson Squar e and Washing ton Mutual discovere d the furthe r incurr ence of debt to ORN L an d the fa ct that ORNL had neve r rele ased its dee d of trust on the L ocketts’ home. A round the same tim e, t h e L o cketts beg an defa ulting on their loan pay

ments to both ORNL and W ashing ton Mutual, and it beca me appa rent that these two e ntities had competing interests i n t h e L ocketts’ home pur suant to their re spective deeds of trust on such proper

ty . Although, b y letters to ORNL , in Febr uary and June of 2004, J ackson Squar e’s attorney reque sted that ORNL

rele ase its deed of trust, O RNLdid not comply and beg an proc eeding s to forec lose on the home. 1

On Fe bruar

y 9, 2005, Washington Mutual filed a complaint ag ainst ORNLalleg ing, a mong other thing s, that ORNL“deliber ately and wr ong fully

ref used to rele ase its Dee d of Trust” a nd reque sted that ORNLbe enjoined f rom fore closing on the prope rty and that Washing ton Mutual’s deed of trust be g rante d first priority . There afte r, the pa rties enter ed into an ag ree d order allowing3

the fore closure sa le to proce ed, and $108,293.09 rea liz ed from the sale was place d in e scrow pe nding the tr ia l c ourt ’s de c isi on

a s to the pa

rt ie s’ ri g hts purs ua

nt t o th e de e ds of

tr us t. Upon trial of the c ase, f

inal judgme nt was ente red in fa vor of the holde r of the second
rec orded de ed of trust, Washing ton Mutual. The trial cour t found that ORNL

had adopte d a pra ctice of advising any

party reque sting a

line of credit pay off as to what, if a ny , additional action would be
re qu ir e d b e fo re the de e d o f t ru st w ou ld b e re le a se d. Ev ide nc e wa s p re se nte d th a t O RN Lfa ile d to adher e to this standard of pr actice when it re sponded to J ackson Squar e’s r equest for the payoff
a mou nts fo r t he L oc ke tts ’ d e bt b y

fa ili ngto a dv ise Jac ks on Squ are that th e L ock ett s mu st al so reque st that ORNLcanc el the line of c redit in order to bring about release of the deed of trust. The tr ia l c ourt fu rt he r s ta te d a s f

oll ow s: Equity reg ards a s done that which should have been done. And what sh ou ld h a ve be e n d on e un de r thes e c ir c ums tanc e s is fo r [O RN L ’s ] deed of trust to have bee n re l ea s ed and to have not exist ed af ter the date that the loa

n was pa id. Following this rationale, the tria l court he ld that ORNL ’s dee d of trust was r elea sed and “ null and void” af ter pay off of the L ocketts’ debt in Marc h of 2002 and that W ashing ton Mutual was entitled to t he pr oc e e ds fr om t

he fo re c los ur e sale of

the L oc ke tts ’ h ome a s f

ir st l ie nh old e r, purs ua

nt t o it s d ee d o f t ru s t

. OR

NL ap p ea l s t h i s ru l i n g.

II. Iss ue
The issue we addre ss in this case is whether the trial court err ed in ruling that the rec orded deed of trust of Washington Mutual, (assigne e of TNB ank) had priority over the first rec orded de ed of trust of ORNL

beca use ORNL was e quitably

estopped fr om asserting its deed of trust as r esult of ORNL ’s fa ilure to comply with its own company standard when, in responding to Jackson Square’ s pay off reque st, it failed to notify J ackson Square of additional action require d for rele ase of such de e d o f t ru st.

III . Ana ly sis

A. St andard of Review

I n a non-jury

case s u ch as t h is one, we r eview the rec ord de novo w ith a presumption of
corr ectne ss as t o the t rial court’s deter mination of facts, and we must honor those findings unle ss the
e vid e nc e pr e po nd e rate s to the c on tr ary

. Te nn . R. App . P. 13 (d ); Union C arbide v. Huddleston
, 854 S.W .2d 87, 91 (Tenn. 1993) . The trial c ourt’s conc lusions of law ar e re v i ew ed de novo and ar e acc orded no pr esumption of corr ectne ss. Cam pbell v. Florida St

eel Corp.
, 919 S.W .2d 26, 35 (T e nn . 1 99 6) ; Presle

y v . Be nne tt , 860 S.W .2d 857, 859 (Tenn. 1993)

.4 B. Equ itable Estoppel We beg in our ana ly sis with the gen er al p re m ise that a de ed of trust re g istered f irst has pr e fe re nc e ov e r a

la te r f ile d deed of tr us t, u

nle ss t he ho lde r o f t

he fi rs t- fi le d in str

ume nt h a d f

ull notice of the pre- exis ting but later -filed instrument. Te nn. Code Ann. § 66-26-105. I n this case, the notice exception is not applicable. The trial court determined that the sec ond-filed de ed of trust ha d pr ior ity ba se d o n th e do c tr ine of

e qu ita ble e sto pp e l.

Th e T e n n e s s e e S u

p r e m e C o u rt h a s r e s t a t e d t h e v ar i o u s e l e m e n t s t h a t a p l a i n t i f f mus t
e sta bli shin o rd e r t o s uc c e ssf

ull y inv ok e the do c tr ine of

e qu ita ble e sto pp e l a s f

oll ow s:
The doc trine of e quitable estoppel require s evidenc e of the following elements with re spect to the pa rty ag ainst whom estoppel is asser ted: (1) Conduct whic h amo u n t s to a false repr esentation
or c on c e a lme nt of

ma te ri a l f

a c ts, or , at le a st, wh ic h is calc ulated to convey

the impression that the fa cts are otherwise tha

n, and inconsistent with, those which the party subsequently

attempts to assert; (2) I ntention, or at least e x pectation that such conduc t shall be ac ted up o n b y th e o th e r p arty ; ( 3 ) K n o w le d g e , a c tu al or
c on str uc tiv e of the re a l f a c ts. Equitable estoppel a lso require s the following elements with re spect to t he pa rt y a sse rt inge sto pp e l: (1) Lack of knowledg e and of the means of knowledge
o f t h e tr u th a s to th e fa c ts in question ; (2) Relianc e upo nth e c o n d

u c t o f th e p arty

e s to p p e d ; a

n d (3) Ac t i o nb as ed t h er eo n o f s u ch a ch ar ac t er as t o ch an ge h i s p o s i t i o np r e

j u d i c i a l l y.
Osborne v. Moun tain Life I n s . Co. , 130 S.W .3d 769, 774 (Tenn. 2004) (citations omitted) (empha sis added).

Th e tr ia l c ourt ’s e sto pp e l r uli ngwa s b a se d u

po n it s f ind ingthat O RN Lfa ile d to fo llo w i ts prac tice of a dvising a

party reque sting a loan pay off amount as to other a ctions that were require d to ensure the rele ase of

any deed of trust securingth e l o an

. W e d o not find that the evidenc e preponde rate s ag ainst this finding and note the t estimony of ORNL employ ees that this was ORNL ’s prac tice and attorney

Seivers’ te stimony

that at the time of pa

y off, ORNL

fa i l ed t o ad vise of the
ne c e ssi ty of any fu rt he r a c tio n r e qu ir e d to e ff e c t r e le a se its de e d o f t

ru st. Wer e the se the on ly circ umstances shown b y t h e ev i d ence in this case, we would ag ree with the trial court’ s decision; howeve r, as discusse d here inafter , other evidence compels us to conclude that Washington Mutual5

failed to e stablish all of the eleme nts require d for e quita b l e es t o p p el in that it failed to prove that Jac kson Squ are and

TN B ank la c ke d “ the me ans of

kn ow le dg e of

the tr uth a s to the fa c ts i n question.”

ORNL ’s re volving c redit dee d of trust, rec orded i n May of 2001, included the following provision, which explicitl y states what was require d of the L ocketts in or der to obtain a re lease of
su c h d e e d o f t

ru st a nd inc lud e s th e re qu ir e me nt t hat th e L oc ke tts re qu e st that the lin e of c re dit wi th ORNLbe ca

ncele d, which re quest was ne ver ma de:

Release . This Deed of

Trust secur es a r evolving line of cr edit and advanc es may

be made , repa id, and rema de from time to time, under the te rm s of the Cr e dit Ag re e me nt. Whe n B or ro we r ( 1) ha s p a id a ll
su ms s e c ur e d b y

thi s D e e d o f T ru st and ( 2) has requested that

t he revolv ing line of credit be canc eled , L ender shall rele ase this De ed of Trust. (Emphasis adde d).

We do not think i t ca n re asonably be ar g ued that Jackson Square a nd TNB ank lac ked the
me ans of a c qu ir ing kn ow le dg e of the a bo ve pr ov isi on se tti ng fo rt h the de e d r e le a se re qu ir e me nts

. Fr om the time of its recor dation, J ackson Squar e, TNB ank and the latter’s a ssigne e, Washing ton Mutual, all had ac cess to ORNL ’s dee d of trust and the infor mation i t contained, a s a matter of public rec ord. I n addition, the proof shows that prior to arr ang ing for pay off of the L ocketts’ de bt to O RN L , attor

ne y Se ive rs re c e ive d c on fi rm a tio n f ro m a tit le a tto rn e y

of OR NL ’s de e d o f t

ru st ag ainst the L ocketts’ pr operty . We believe that having been made aware of t his fac t, due dilige nce require d that J ackson Squar e examine the conte nts of the dee d of trust for any provisions setting fo rt h w hat a c tio ns wo uld be ne c e ssa ry fo r the de e d’ s re le a se

. Jac ks on Squ are and TN B ank sh ou ld have be en par

ticularly aler t to the possibil ity

that ORNL ’s deed o f t ru s t might contain suc h a provision, give n the fa ct that, as attested by attorney Seivers, TNB ank’s own de ed of trust sec uring its loan t o the L ocketts and notarized by attorney Seviers, also include d a re lease provision setting forth spec ific pre requisites to such dee d’s re lease

.
F ur the rm or e , a s p ro vid e d b y

Te nn e sse e statut or

y law, wh e n O RN Lre c or de d it s d e e d o f t ru st in May o f 2 0 0 1 , it th e r e b y p r o v id e d n o ti c e o f th e d e e d o f tr u s t an d it s c o n te n ts to “ a ll the world,” which, of course , included J ackson Square, Washing ton Mutual, and TNB ank. Te nn. Code Ann. § 66-26-102. At tria l, the trial court stated that “[t] he fac t that the information was out there lodg ed in a re g ister of de eds off i ce s o mewher e, ce rtainly , in the absenc e of O RNL ’s self- imposed obligat i o n s , would have be en enoug h to bind the titl e compa ny and TNB ank and Washing ton Mutual.” We respe ctfully disag ree that ORNL ’s failure, at the t ime of payoff, to follow its policy reg ardingnotific at i o n o f d eed relea se pre requisites ser ved to neg ate the f

act that notice of such pr e re qu isi te s h a d a lr e a dy

be e n g ive n a s a

re su lt o f O RN L ’s re g ist

ratio n o f i ts d e e d. I n o the r w or ds , notwithstanding a

ny act or omission of ORNL alleg ed by Washington Mutual in this case, we do not be lie ve it ca

n re a so na bly be a sse rt e d tha t Jac ks on Squ are , Wa sh ing ton

Mu tua l, a nd TN B ank , d id n ot,6

afte r such a ct or omission, have infor mation that, as a matter of statutory law, they wer e held to have had prior to suc h act or

omission.

I n its brie f, Washington Mutual states that “[i] f a party brea ches a duty by leadinganother to b e lie ve tha

t th e pa rt y ’s de bt h a s b e e n s a tis fi e d, the pa rt y wi ll n ot b e a llo we d to a sse rt its lie n to the pre judice of the other that ha s been misl ead.” I n support of this statement, Washington Mutual cites the following lang uag e of the Tenne ssee Supreme Court in Churc h of Chri st v . M c Do nal d , 171 S.W .2 d 817 (Tenn. 1943) , quoting the Court’ s ear lier ruling in Bri sto l- Go od

so n Ele c . L igh t & Power Co. v. Bristol

Gas, E.L. & P. Co. , 42 S.W . 19, 21 (Tenn. 1897) : [O] ne “w ill not be a l l o we d t o asser t his li en to the pre

judice of persons whom he has induced to believe that his debt been satisfied, or that he will c laim no lien and who, in that belief, ha ve purc hased that proper

t y on which the lien r ests.” The Court further held the rig ht to invoke the doctrine “does not alway s rest on the intention of the par ty to be af fec ted by it, but i s depende nt, rather , upon the
rea sonable or le g itim at e effec t of his statement or conduc t in the particula r matter upon the course of [others].”

Mc Do nal d , 171 S.W .2d at 821 (c itations omi tted) (e mphasis omitt ed).

W ashi ng ton

Mu tua l a lso no te s th e fo llo wi nga dd iti on a l la ngua g e fr om Mc

Do nal d for the pr op os iti on

that f a ilure to s pe a k ma

y a lso tr ig g e r a

n e qu ita ble e sto pp e l:

Th e ter m ‘conduc t’, when a

pplied to a per son in relation to the modern doctrine of e quitable estoppel, e mbrac es not only ideas convey ed by

words wr itt en or spoken a nd things a ctually

done, but inc lud e s th e sil e nc e of

su c h p e rs on

and his omi ssi on

to a c t, a s w e ll.

Id.

Ba sed upon our f inding, in ac corda

nce w ith Tenn. Code Ann. § 6 6 -2 6 -102, t hat ORNL ’s reg istration of its deed of trust with its relea se provision constituted notice to all the world as to what would be re quired for

rele ase, w e do not a g ree that the above cited languag e of our Supreme Court mandates e quitable estoppel in t he instant ca se. Given suc h notice, it cannot be said that ORNL induced a ny party to believe that it would claim no li en on the L ocketts’ home a s a re sult of pay off
a lon e , a nd the “reas ona

ble e ff e c t” of su c h n oti c e wa s th a t f

ur the r a c tio n w a s n e c e ssa

ry to o bta in rele ase of its de ed of trust. Nor, g iven such notice, can it be said that ORNL was silent or omitted to a c t. Washington Mutual also conte nds that the trial court’s ruling is supported by our dec ision in Be nne tt , et al. v

. Treve cca N

azarene Univ. , No. M2004-01287-COA- R3-CV, 2005 WL 2487979 (T e nn . Ct . App . M .S. , f

ile d A ug . 1 8, 20 05 ), wh ic h w a s r e c e ntl y a ff ir me d by the Te nn e sse e Sup re me7

Court in Bennett, et al. v. Trev ecc a Nazarene Univ. , 2 16 S.W. 3d 29 3 ( Te nn . 2 00 7) . A g a in, we mus t disag ree

.
I n Be nne tt , p la int if

f e le c tr ic ians su e d th e de fe nd ant u niv e rs ity fo r i nju ri e s th e y su sta ine d in
a hig h v olt a g e e le c tr ic a l e xplos ion that occ ur

re d w hil e the pla int if

fs we re a tte mpt ingto r e pa ir malfunctioning elec trical e quipment belong ing to the de fenda nt. The suit char g ed that the de fenda nt was liable f

or the plaintiffs’ injuries upon the alleg ation, among others, that bef o re the plaintiffs be g an w or

k, the de fe nd ant ne g lig e ntl y un de rs ta te d the a mou nt of vo lta g e c arr ie d b y

su c h e qu ipm e nt. The tria l co u rt grante d the def endant summary

judgme nt based upon the “ independe nt contrac tor rule” w h ic h p r o v id e s th a t a p r e mi s e s o w n e r is r e li e v e d o f th e d u ty o f r e a s o n a

b le car e to an ind e pe nd e nt c on tr a c tor

wh o is inj ur e d w hil e makin g sp e c if ic re pa ir s ca lle d for in the wo rk c on tr a c t. We reve rsed the judg ment of the trial c ourt and he ld that althoug h the defendant may not have ha d a duty to speak a s to the amount of voltag e in question, once the def end an t ch o s e t o s p eak in that reg ard it assumed the duty of spea king tr uthfully , notwithstanding that, unde r the indepe ndent contra ctor’s r

ule, the re pair c ontrac t itself served to put the plaint i ff s on notice of ha zards such as the on e that r e su lte d in

the pla int if

fs ’ i nju ri e s: The duty of [defenda

nt] in this ca s e ar ose not from the c ontrac t but fr om t he fa c t th a t it

“ c ho se to s pe a k” a s to a

c ri ti cal inq

uir y wh e n it was unde r no duty

to speak. Taking the evidenc e of [p]l aintiffs as true, TNC kne w that the powe r box was high voltag e, y et informed [p] laintiffs that it was low vol t age . Havingassumed to speak, [defendant] was re q u i re d t o s p eak the truth and did not do so . . . . D e f e n d an t , h a v i n g c h o s e n[ t o ] s p e a k , w a s u n d e r t h i s a s s u m e d

d u t y; it d id n ot fu lf

ill the du ty

by pr ov idi ngfa lse inf

or ma tio n to [p]la int if

fs

.

Be nne tt , 2005 WL 2487979 at *9.

Was hin g ton

Mu tua l c on te nd s th a t Be nne tt “ supports relianc e on estoppel d u e t o ORNL ’s
ow n s e lf -i mpo se d p ra c tic e re qu ir ingOR NL to r e ve a l w hat w a s n e c e s s a r y to c los e the re vo lvi ngho me equity line of cr edit acc ount when a r efina ncing transac tion occurr ed.”

We d isa g re e that Be nne tt is analog ous to the case at bar . I n B e n n e tt , the p la int if fs ’ s uit would have f

ailed pursua

nt to the independent c ontrac tor’s rule but for the fa ct that under

the standard a pplicable in the r eview of a motion f

or summary judgme nt, the defe ndant in that case was found to have aff

irmatively

and spec ifically

misadvised the plaintiffs as to the amount of voltag e, and ther efor e, the de g ree of hazard. I n the instant case , neither at the t ime of payoff nor at any other time, did ORNLaff

irmatively misadvise Washington Mutual as to what a ction would be re quired befor e ORNL

would rele ase its dee d of trust. On the contr ary , unlike the def endant in Bennett, who g ave the plaintiffs inacc urate information, ORNL i n register ing its dee d of trust provided Washington Mutual with complete a nd acc urate information as to the matter of inquiry . Had ORNL specific ally

stated that re lease of its deed of trust would require no action other than payoff of

the underlying debt, the Court’s ruling in Be nne tt wo uld be re le va nt t o a de c isi on in t he c a se be fo re us

.8

Ho we ve r, OR

NL did no t do so and

a c c or din g ly , Wa sh ing ton Mu tua l’ s a

rgume nt i s w ith ou t me ri t.

IV . Conclu sion

For the re asons set for

th in this opinion, the judgment of the trial c ourt is reve rsed. Costs of appea l are assessed to the a ppellee, Washing ton Mutual Bank, F .A.

_________________________________________ SHARON G. L EE, J UDGE