                 IN THE COURT OF APPEALS OF TENNESSEE
                              AT JACKSON
                                September 20, 2004 Session

          GREG DAVIDSON, ET AL. v. BANK OF FRIENDSHIP, INC.
                                AND
             THEODA DUNN v. BANK OF FRIENDSHIP, INC.

               Direct Appeal from the Chancery Court for Henderson County
                    No. 14850 and 14854   Ron E. Harmon, Chancellor



                  No. W2003-01887-COA-R3-CV - Filed November 5, 2004


The trial court awarded judgment to Plaintiffs upon determining that the Bank of Friendship could
not foreclose on Plaintiffs’ properties because the Bank had failed to apply proceeds from a sale
under a deed of trust to a senior deed of trust. We reverse and remand for further proceedings.


  Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed and
                                       Remanded

DAVID R. FARMER , J., delivered the opinion of the court, in which W. FRANK CRAWFORD , P.J., W.S.,
and ALAN E. HIGHERS, J., joined.

David A. Riddick, Jackson, Tennessee, for the appellant, Bank of Friendship, Inc.

Carthel L. Smith, Lexington, Tennessee, for the appellees, Greg Davidson and Kim Davidson.

Danny R. Ellis, Jackson, Tennessee, for the appellee, Theoda Dunn.


                                           OPINION


        This dispute concerns lots in the West Pointe subdivision in Henderson County.
Plaintiffs/Appellees Greg Davidson (Mr. Davidson) and Kim Davidson (Ms. Davidson and,
collectively, “the Davidsons”) and Theoda Dunn (Ms. Dunn) purchased the lots at auction in August
1999. The lots were part of a larger parcel owned by Blankenship/Melton Real Estate, Inc.
(“Blankenship/Melton”). The parcel was divided into approximately 26 lots and on May 20, 1999,
Blankenship/Melton pledged them to the Bank of Lexington (a branch of the Bank of Friendship,
hereinafter “the Bank”) as collateral for a $295,000 loan. The loan was secured by a recorded deed
of trust.

        On August 7, 1999, Delta Auction auctioned the property at the request of
Blankenship/Melton. At the time of the auction, the loan was not in default. At auction, Ms. Dunn
purchased lots 103 and 110; the Davidsons purchased lots 104, 105 and 391 Parker Circle. Ms.
Dunn and the Davidsons (hereinafter, collectively, “Plaintiffs”) paid a deposit to Delta Auction and
the remainder of the purchase price to Blankenship/Melton. Ms. Dunn paid $18,900 to
Blankenship/Melton and the Davidsons paid $32,250 to Blankenship/Melton. Plaintiffs did not have
title searches prepared on the properties. The warranty deeds conveying the properties from
Blankenship/Melton to Plaintiffs do not declare that the properties were encumbered by the
mortgage. Following the auction, Blankenship/Melton, in turn, paid $227,300 on the $295,000 note
to the Bank, leaving a balance of approximately $60,000.

        After the auction, the Bank released the majority of the lots which comprised the original
parcel. As of June 2002, approximately eight lots still remained on the deed of trust. Lots 86 and
87 of the parcel were purchased by Larry Steve Melton. The Bank released lot 86 from the deed of
trust on March 28, 2000, but did not formally release lot 87. Larry Steve Melton then pledged lots
86 and 87 as collateral for a loan of approximately $184,000 (“the Melton loan”). Thus, lot 87 was
encumbered by the original deed of trust (“the senior mortgage”) and the Melton loan, and lot 86 was
encumbered by the Melton loan. Larry Steve Melton defaulted upon this loan and the Bank
foreclosed on the property. The two lots were purchased at foreclosure by the Bank for $120,000.
The Bank applied these proceeds to the Melton loan.

        In March 2001, Plaintiffs received notice that the Bank was foreclosing on their lots under
the deed of trust. In April 2001, Plaintiffs filed complaints for declaratory judgment in the Chancery
Court of Henderson County seeking quiet title and a judgment declaring the lien invalid. In their
complaints, Plaintiffs assert the Bank agreed to the 1999 auction sale as an alternative to foreclosure.
Plaintiffs also moved the court to temporarily enjoin the Bank from foreclosing on their properties.
The trial court granted their motion pending further orders of the court.

        The trial court entered final judgment for Plaintiffs on September 29, 2003. The trial court
determined that, as a matter of law, the Bank could not foreclose on Plaintiffs’ properties because
the Bank should have applied the proceeds from the foreclosure sale of lots 86 and 87 to satisfy the
senior mortgage held by the Bank on the same property. The trial court held the Bank had no further
lien on the lots owned by Plaintiffs. The trial court further awarded Plaintiffs’ attorneys’ fees. The
Bank filed a timely notice of appeal to this Court.

                                          Issues Presented

       The dispositive issues presented by this appeal, as we perceive them, are:




                                                  -2-
         (1)      Whether the trial court erred by holding that, as a matter of law, the Bank
                  could not foreclose on Plaintiffs’ properties because the Bank should have
                  satisfied the senior mortgage with proceeds of the foreclosure sale of lots 86
                  and 87 where lot 87 remained encumbered by the senior mortgage in addition
                  to the Melton loan.

         (2)      Whether the Bank waived its right to foreclosure by agreeing to the auction
                  sale in lieu of foreclosure and by agreeing to release the liens created by the
                  senior mortgage.

         (3)      Whether the trial court erred in awarding Plaintiffs’ attorneys’ fees.

                                               Standard of Review

       Our standard of review of a trial court sitting without a jury is de novo upon the record. See
Wright v. City of Knoxville, 898 S.W.2d 177, 181 (Tenn. 1995). We presume the trial court’s
findings of fact to be correct unless the evidence preponderates otherwise. Tenn. R. App. P. 13(d).
Thus, we may not reverse the trial court's factual findings unless they are contrary to the
preponderance of the evidence. We review the trial court’s conclusions on matters of law de novo,
with no presumption of correctness. Tenn. R. App. P. 13(d); Bowden v. Ward, 27 S.W.3d 913, 916
(Tenn. 2000).

                                                      Analysis

        We first turn to the trial court’s determination that, as a matter of law, the Bank should have
applied the proceeds of the foreclosure sale of lots 86 and 87 under the Melton loan (hereinafter,
alternatively, “the junior mortgage”) to the balance due on the senior mortgage, thereby
extinguishing the mortgage liens on Plaintiffs’ properties. As an initial matter, we note that when
the Bank foreclosed on lots 86 and 87, it did so under the junior mortgage.1 We additionally note
that the amount due under the Melton loan was approximately $184,000, that the Bank itself
purchased the property for $120,000, and that the Circuit Court of Henderson County awarded the
Bank a judgment against Larry Steve Melton for the deficiency. Plaintiffs argue, and the trial court
apparently determined, that these amounts should have been applied to the senior mortgage. This
determination was in error as a matter of law.

       Generally, the foreclosure of a junior mortgage does not affect the rights of a senior mortgage
holder where the prior mortgagee is not made a party to the action and is not provided for in the
foreclosure decree. 59A C.J.S. Mortgages § 961 (1998). Although, as a general rule, the surplus
generated from foreclosure of a prior lien may be paid to the junior lien holder, the reverse is not


         1
          W e note that the Bank had released the original lien on lot 86 and apparently believed the lien on lot 87 also
had been released. Thus, foreclosure could only have proceeded under the junior mortgage and not, as Plaintiffs suggest,
under the original deed of trust.

                                                          -3-
true. Id. Thus, a purchaser under a foreclosure sale takes subject to the senior mortgages. Id.
Further, in general, where a lender holds more than one mortgage on a property, forecloses under a
junior mortgage, advertises that the property is offered subject to prior mortgages, and purchases the
property itself, any surplus reverts to the mortgagor. Bolerjack v. Fid. Sav. & Loan Ass’n,
Rutherford Equity App. No. 88-217-II, 1988 WL 126839, at *8 (Tenn. Ct. App. Nov. 30, 1988) no
perm. app. filed (discussing Spalding v. Quincy Trust Co., 49 N.E.2d 251 (Mass. 1943)). Any
surplus is not applied to the senior mortgages under such facts. Id.

         In the present case, the Bank foreclosed on lot 86 and 87 under the deed of trust pursuant to
the Melton loan. This was the Bank’s only lien on lot 86, which had been released from the original
deed of trust, and was a junior mortgage on lot 87. Moreover, the foreclosure sale did not generate
the full amount of the Melton loan. Thus, no surplus resulted which could have been applied to the
senior mortgage. The record is silent as to whether the Bank advertised lots 86 and 87 as free of
encumbrances when it foreclosed on the property, but we believe that is not relevant to the claims
of Plaintiffs here. Thus, the Bank’s lien on Plaintiffs’ properties was not extinguished by the
foreclosure sale of lots 86 and 87.

        We next turn to Plaintiffs’ argument that the Bank waived its lien when it agreed to the 1999
auction as an alternative to foreclosure under the deed of trust, and that the Bank agreed to release
its lien on properties sold at the auction. Larry Steven Melton (Mr. Melton), an agent for
Blankenship/Melton, testified that Mr. Benny Fesmire (Mr. Fesmire), a majority shareholder, senior
vice president, and member of the board of the Bank, agreed that all property sold at the auction
would be released from the deed of trust. Mr. Melton further testified that when he became aware
that the Bank had not released Plaintiffs’ properties he “made several trips to the bank and begged
him [Mr. Fesmire] to release those people[’s] property.” Mr. Melton testified that Mr. Fesmire was
“kind of wishy washy” in response and that “[o]ne day he’d say he was going to release them, you
know, come Friday or Monday and then, one day he’d say ‘just get us our money. Just worry about
your money.’”

        Mr. Davidson testified that there was no indication that the property was encumbered when
it was auctioned. Mr. Davidson also testified that, after he received the foreclosure notice, he
discussed the situation with Todd Henderson (Mr. Henderson), who was employed by the Bank in
May 2000. Mr. Davidson stated that Mr. Henderson assured him the matter would “work itself out.”


        Ms. Dunn testified that, on the day of the auction, Jasper Jones (Mr. Jones) of Delta Auction
told her that she would be “[guaranteed] a title” to the property. She additionally testified that Mr.
Jones announced this guarantee at the auction. Ms. Dunn also testified that, when she became aware
that the Bank was foreclosing on the Davidson’s property, she telephoned the Bank to inquire
whether her property was included in the foreclosure and that the Bank assured her it was not. Ms.
Dunn testified that she then received a letter advising her that the Bank was foreclosing on the
property. Ms. Dunn testified that she had no conversation with either Mr. Henderson or Mr.
Fesmire.


                                                 -4-
         The Bank, on the other hand, asserts that it had no formal agreement with
Blankenship/Melton regarding when the lots would be released or sold. The Bank further asserts
that, although it released some of the lots from the deed of trust, it retained enough real estate as
collateral for the outstanding indebtedness. The Bank contends Plaintiffs’ properties are included
in the retained real estate. Additionally, the Bank submits that had Plaintiffs conducted a title search
of the property, it would have revealed the recorded lien. The Bank asserts that Plaintiffs may have
mistakenly relied upon statements made by Delta Auction and/or Blankenship/Melton that the lots
were free of any liens. The Bank contends that Plaintiffs’ properties were secured by the recorded
deed of trust at all times relevant to this lawsuit and that Plaintiffs’ cause of action for
misrepresentation, if any, is against Blankenship/Melton and not against the Bank.

        It is not disputed that Mr. Fesmire attended the August 1999 auction, that he bought property
at the auction, and that the Bank released this property from the deed of trust. The Bank also does
not dispute that it released several, if not most, of the auctioned lots from the deed of trust. Further,
the parties do not dispute that Blankeship/Melton conveyed the auctioned property to Plaintiffs by
warranty deed, that the property was secured by the deed of trust at the time of the auction, that the
original loan was not in default at the time of the auction, or that the entire indebtedness was not
paid.

       The disputed issues of fact, as we perceive them, are 1) whether the Bank agreed, orally or
otherwise, to release all the property sold at auction from the deed of trust and 2) whether the Bank
waived its lien by acquiescing to an alleged announcement by Delta Auction at the 1999 auction that
the property was offered free and clear of any lien or encumbrance.

        The trial court made no findings concerning these issues. Additionally, the brochure
advertising the auction is silent regarding whether the property was offered free of any lien. It offers
only “owner financing at bank rates.” Further, because it held that the Bank could not assert its lien
as a matter of law, the trial court did not address the issue of waiver in its judgment. Accordingly,
we remand to the trial court for further proceedings on this issue.

       We turn next to the question of whether an award of attorneys’ fees was appropriate in this
case. In light of our holding in this matter, the award of attorneys’ fees is reversed. We decline to
address whether an award of attorneys’ fees would be appropriate upon disposition on remand as
advisory.

                                               Holding

        In light of the foregoing, we reverse the judgment of the trial court and remand for further
proceedings consistent with this opinion. Costs of this appeal are taxed equally to Appellees, Greg
Davidson, Kim Davidson, and Theoda Dunn, and Appellant, the Bank of Friendship, Inc., and its
surety, for which execution may issue if necessary.




                                                  -5-
      ___________________________________
      DAVID R. FARMER, JUDGE




-6-
