                 IN THE COURT OF APPEALS OF TENNESSEE
                              AT JACKSON
                                   October 25, 2011 Session

                 BANCORPSOUTH BANK
                          v.
  51 CONCRETE, LLC & THOMPSON MACHINERY COMMERCE
                     CORPORATION

                   Appeal from the Chancery Court of Shelby County
                    No. CH-09-1092-1 Walter L. Evans, Chancellor


                  No. W2011-00505-COA-R3-CV - Filed April 16, 2012


This is a conversion case. The appellant bank perfected its security interest in collateral for
a loan by filing a UCC-1 statement. The debtor subsequently sold the collateral to appellee
third parties, representing that there were no liens on the collateral. The appellee third parties
later sold the collateral. The debtor defaulted on the loan to the appellant bank, and the bank
obtained a default judgment against the debtor. The debtor then filed bankruptcy. The
appellant bank filed this lawsuit against the appellee third parties for conversion, seeking the
proceeds from the sale of the collateral. The trial court dismissed the case for lack of subject
matter jurisdiction, holding that the bankruptcy court had exclusive jurisdiction. The trial
court also adjudicated the bank’s claims for punitive damages and attorney fees. The bank
now appeals. We reverse the trial court’s holding on its subject matter jurisdiction, vacate
its rulings on the claims for attorney fees and punitive damages, and remand.

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

H OLLY M. K IRBY , J., delivered the opinion of the Court, in which A LAN E. H IGHERS, P.J.,
W.S., and D AVID R. F ARMER, J., joined.
Jeffrey D. Germany and H. Chase Pittman, Memphis, Tennessee for Plaintiff/Appellant,
BancorpSouth Bank.

W. Clark Washington and Christy              F.     Washington,   Memphis     Tennessee    for
Defendant/Appellee, 51 Concrete, LLC.

Scott A. Frick, Memphis, Tennessee for Defendant/Appellee, Thompson Machinery
Commerce Corporation.

                                         OPINION

                            F ACTS AND P ROCEEDINGS B ELOW

In June 2006, John Chorley (“Chorley”) executed a promissory note and security agreement
in favor of the Plaintiff/Appellant BancorpSouth Bank (“BancorpSouth”) in exchange for a
loan of $75,585.95. The security agreement gave BancorpSouth a security interest in “all of
the Property described . . . wherever the Property is or will be located, and all proceeds and
products of the Property.” The loan was secured by three pieces of equipment: a bulldozer,
an excavator, and a backhoe. The security agreement describes the property generally as “all
equipment,” and states that it “covers the above collateral, whether now owned or hereinafter
acquired, together with all supporting obligations, proceeds, products . . . . The inclusion of
proceeds does not authorize debtor to sell or trade the above described property.” The next
day, BancorpSouth filed a UCC-1 financing statement on the secured equipment with the
Tennessee Secretary of State.

In August 2006, Chorley purchased a new bulldozer from Defendant/Appellee Thompson
Machinery Commerce Corporation (“Thompson”). He traded the secured bulldozer in
exchange for an $18,000 cash discount on the new bulldozer. Chorley affirmatively
represented to Thompson that there were no liens, debts, or encumbrances on the trade-in
bulldozer, and that it was his sole property. Shortly thereafter, Thompson sold the secured
bulldozer to a third party for $18,500.

In December 2006, Chorley purchased a new trackhoe from Thompson. In doing so, Chorley
traded in the secured excavator and received a trade-in credit of $42,500 toward the purchase
of the new trackhoe. Chorley made similar misrepresentations to Thompson that the trade-in
excavator was not subject to any debts or encumbrances. Thompson then sold the secured
excavator to the same third party for the amount of Chorley’s trade in. Thompson did not
perform a UCC records check on either the bulldozer or the excavator traded in by Chorley.




                                              -2-
In June 2007, Chorley gave Defendant/Appellee 51 Concrete, LCC (“51 Concrete”)
possession of the secured backhoe in exchange for a $23,000 credit against an existing debt
Chorley owed to 51 Concrete. This secured backhoe was subsequently sold by 51 Concrete
for $23,000, which was applied to Chorley’s account at 51 Concrete. After the $23,000
credit was combined with a loan from another bank, Chorley received a lien waiver in which
51 Concrete waived any further claims it had against Chorley on his debt.

In May 2008, Chorley defaulted on his obligations to BancorpSouth under the June 2006
security agreement. As a result, BancorpSouth filed a lawsuit against Chorley. In July 2008,
BancorpSouth received a default judgment against Chorley in the amount of $55,703.37, with
post-judgment interest.

After acquiring the default judgment against Chorley, BancorpSouth made demand on
Thompson for the $61,000 it received for the sale of the secured bulldozer and excavator. It
made a similar demand against 51 Concrete for the $23,000 in proceeds realized from the
sale of the secured backhoe. Both Thompson and 51 Concrete acknowledge receiving
demand letters; however, no proceeds were surrendered by either party at that time.

In May 2009, Chorley filed a petition in the United States Bankruptcy Court for the Western
District of Tennessee, seeking bankruptcy protection under Chapter 7. By that time
Chorley’s debt to BancorpSouth, including post-judgment interest, totaled $60,561.94.
Neither Thompson nor Concrete 51 were listed as creditors by Chorley in his bankruptcy
filing, and neither filed an objection to his bankruptcy petition. In December 2009, Chorley
was granted a discharge under Chapter 7.

Meanwhile, shortly after Chorley filed his bankruptcy petition, BancorpSouth filed the
instant lawsuit in the Shelby County Chancery Court (“trial court”) against Thompson and
51 Concrete. The complaint sought money damages, attorney fees, and punitive damages for
conversion and for voiding BancorpSouth’s security interest in the secured equipment. After
some delay, both Thompson and 51 Concrete answered, denying BancorpSouth’s allegations.
Discovery ensued.

The trial court conducted a bench trial on September 15, 2010. After hearing the testimony
of four witnesses, the trial court presented counsel for both sides with approximately nineteen
questions. The parties were asked to submit stipulations and contentions, as well as proposed
findings of facts and conclusions of law. All parties did so. In its post-trial submission,
51 Concrete argued that the trial court lacked jurisdiction because BancorpSouth failed to




                                              -3-
request a lift of the automatic stay in Chorley’s bankruptcy proceeding.1 Thompson’s post-
trial submission asserted that proceeds from the sale of the collateral that exceeded
BancorpSouth’s judgment against Chorley should have been included in Chorley’s
bankruptcy estate. On this basis, Thompson argued that the bankruptcy trustee had an
interest in the excess proceeds and BancorpSouth should have sought relief from the
automatic bankruptcy stay prior to filing the action against Thompson and 51 Concrete.

On January 5, 2011, the trial court entered an order. The trial court found that the collateral
securing BancorpSouth’s loan to Chorley was worth more than the total amount owed by
Chorley to BancorpSouth. Based on this, the trial court found that Chorley had an interest
in the proceeds from the sale of the collateral, and therefore the proceeds from the sale of that
collateral were part of Chorley’s bankruptcy estate pursuant to 11 U.S.C. § 541. The trial
court found that the automatic bankruptcy stay from Chorley’s bankruptcy prohibited
BancorpSouth from proceeding against Chorley or against property of the bankruptcy estate,
and the bankruptcy trustee was the proper party to bring the claims asserted by BancorpSouth
against Thompson and 51 Concrete. Consequently, it held that BancorpSouth’s claims fell
within the exclusive jurisdiction of the bankruptcy court. On that basis, the trial court
concluded that it did not have subject matter jurisdiction over BancorpSouth’s claims. It
dismissed without prejudice BancorpSouth’s claims against the proceeds from the sale of the
collateral.

After holding that it lacked subject matter jurisdiction over BancorpSouth’s claims to the
proceeds, the trial court went on to adjudicate BancorpSouth’s claims for attorney fees and
punitive damages. On the issue of attorney fees, the trial court concluded that even if it had
subject matter jurisdiction to award such fees to BancorpSouth, there was neither a
contractual nor a statutory basis for doing so.

With respect to punitive damages, the trial court stated that the expert testimony submitted
at trial showed that Chorley sold the collateral to Thompson and 51 Concrete at a time when
UCC searches were not routinely performed in the heavy equipment industry. It also found
that, had the proceeds been turned over by Thompson and 51 Concrete to anyone other than
the bankruptcy trustee, it would have been in violation 11 U.S.C. § 542. On this basis, the
trial court held that BancorpSouth had failed to establish conduct by Thompson and 51
Concrete that merited punitive damages. BancorpSouth now appeals.




1
 The record indicates that BancorpSouth received its default judgment against Chorley in July 2008, well
before Chorley filed his bankruptcy petition in May 2009.

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                      ISSUES ON A PPEAL AND S TANDARD OF R EVIEW

On appeal, BancorpSouth argues that the trial court erred in ruling that it was not entitled to
recover compensatory damages, attorney fees and litigation expense from Thompson and 51
Concrete’s proceeds from the sale of the collateral, even though BancorpSouth held an
attached and perfected security interest in the collateral. BancorpSouth also contends that
the trial court erred in ruling that BancorpSouth was not entitled to recover punitive damages
from Thompson and 51 Concrete.

The issue of whether a trial court lacked subject matter jurisdiction is a question of law;
therefore it is reviewed de novo, with no presumption of correctness. Morgan Keegan & Co.
v. Smythe, No. W2010-01339-COA-R3-CV, 2011 WL 5517036, at *3; 2011 Tenn. App.
LEXIS 613, at *11 (Tenn. Ct. App. Nov. 14, 2011); Tenn. Envtl. Council v. Water Quality
Control Bd., 250 S.W.3d 44, 55 (Tenn. Ct. App. 2007). Findings of fact made by the trial
court are reviewed de novo, with a presumption of correctness unless the preponderance of
the evidence is to the contrary. Tenn. R. App. P. 13(d) (2011).

With respect to the disallowance of attorney fees by the trial court, the appellate court will
not interfere with a trial court’s decision regarding attorney fees except upon a clear showing
of abuse of discretion. Taylor v. Fezell, 158 S.W.3d 352, 359 (Tenn. 2005) (quoting Aaron
v. Aaron, 909 S.W.2d 408, 411 (Tenn. 1995)). A trial court abuses its discretion when it
“applies an incorrect legal standard, or reaches a decision which is against logic or reasoning
that causes an injustice to the party complaining.” Eldridge v. Eldridge, 42 S.W.3d 82, 85
(Tenn. 2001).

                                          A NALYSIS

BancorpSouth argues first that the trial court erred in not awarding it compensatory damages
arising from the sale of its collateral by Thompson and 51 Concrete. The trial court found
that BancorpSouth was precluded from asserting a claim against the proceeds from the sale
of the collateral because Chorley, and thus the bankruptcy trustee, had an interest in the
proceeds. Consequently, the proceeds were then part of Chorley’s bankruptcy estate. In
order to assert a claim against the proceeds, the trial court held, BancorpSouth was required
to first obtain relief from the bankruptcy automatic stay; since BancorpSouth failed to do so,
its action against Thompson and 51 Concrete was in violation of bankruptcy statutes. On this
basis, the trial court held that the bankruptcy court had exclusive jurisdiction, and that the
trial court lacked subject matter jurisdiction to adjudicate BancorpSouth’s claim against the
proceeds.




                                              -5-
Thompson and 51 Concrete both argue that the trial court’s ruling is correct. Following the
reasoning of the trial court, 51 Concrete argues that the trial court lacked jurisdiction over
BancorpSouth’s claim against the proceeds from the sale of the collateral because
BancorpSouth failed to file a petition for relief from the automatic stay provision contained
in 11 U.S.C. § 362, before filing this conversion action. 51 Concrete contends that the
bankruptcy court had exclusive jurisdiction over all of the property of debtor Chorley, but
does not specifically explain what property of Chorley would have been part of the
bankruptcy estate.

Thompson contends that the trial court’s ruling is correct because “the cause of action being
asserted concerned property in which the Bankruptcy Trustee had a legal or equitable
interest.” Thompson notes that the combined proceeds from the sale of all three pieces of
secured equipment totaled approximately $23,000 more than BancorpSouth’s judgment
against Chorley. From this, Thompson reasons that Chorley and the bankruptcy trustee had
a legal and/or equitable interest in the surplus proceeds, so the trial court correctly held that
the matter fell within the exclusive jurisdiction of the bankruptcy court.

To analyze this issue, we must examine the relevant bankruptcy statutes and determine
whether Chorley’s bankruptcy trustee had any interest in the proceeds from the sales of the
collateral for Chorley’s debt to BancorpSouth. As rightly noted by the trial court, the
bankruptcy court has exclusive jurisdiction of all property of the debtor, wherever located,
as of the commencement of the bankruptcy case, and of property of the bankruptcy estate.
28 U.S.C. 1334(e)(1). Under 11 U.S.C. § 541(a), the bankruptcy estate is comprised of “all
legal or equitable interests of the debtor in property as of the commencement of the case.”
11 U.S.C. § 541(a)(1). Therefore, we must determine if Chorley retained an interest in the
proceeds from the sale of the collateral by Thompson and 51 Concrete to third party buyers
when he filed his bankruptcy petition in May 2009.

From our review of the record, we find no indication that Chorley retained any interest in any
of the items of collateral after they were sold to 51 Concrete and Thompson in 2006 and
2007. Rather, the record reflects that Chorley transferred full ownership of the equipment
to Thompson and 51 Concrete. Chorley was given value for the secured collateral in the
form of either trade-in credit on another piece of equipment or credit against an existing
indebtedness. Both Thompson and 51 Concrete sold the collateral to a third party for roughly
the amount of value that had been given to Chorley. Therefore, nothing in the record
indicates that Chorley retained any interest in the secured equipment after it was transferred
to 51 Concrete and to Thompson.




                                               -6-
In the alternative, Thompson argues that Chorley’s discharge in bankruptcy extinguished
BancorpSouth’s right to file this action as to the proceeds from the sale of the collateral. We
disagree.

While Chorley’s discharge in bankruptcy eliminated Chorley’s personal liability for his debt
to BancorpSouth, a bankruptcy discharge does not extinguish the debt itself. Tenn. Student
Assistance Corp. v. Hood, 541 U.S. 440, 447 (2004); In re Edgeworth, 993 F.2d 51, 53 (5th
Cir. 1993); In re Morris, 430 B.R. 824, 828 (Bankr. W.D. Tenn. 2010); In re Castle, 289
B.R. 882, 886 (Bankr. E.D. Tenn. 2003). The United States Supreme Court has explained:
“a bankruptcy discharge extinguishes only one mode of enforcing the claim – namely, an
action against the debtor in personam – while leaving intact another – namely, an action
against the debt in rem.” Johnson v. Home State Bank, 501 U.S. 78, 84 (1991); In re
Holloway, 81 F.3d 1062, 1063 n.1 (11th Cir. 1996); see also In re Wagner, 342 B.R. 766,
770 (Bankr. E.D. Tenn. 2006) (“a lien created prior to the bankruptcy to secure the debt will
survive the bankruptcy discharge” and a “discharge of personal liability does not extinguish
a lien.”). A bankruptcy discharge does not prevent a secured creditor from enforcing its
security interest if the underlying debt remains unpaid. Chase Manhattan Mortg. Corp. v.
Street, No. W2007-02553-COA-R3-CV, 2010 WL 1462544, at *2 (Tenn. Ct. App. Apr. 14,
2010). Therefore, we must reject this argument.

Thompson and 51 Concrete argue that Chorley’s bankruptcy estate would have had an
interest in any proceeds from the sale of the collateral that exceeded the amount of
BancorpSouth’s judgment against Chorley. Thompson notes that, under the Uniform
Commercial Code (“UCC”), a secured party is generally required to return the surplus
proceeds from the sale of collateral in the a designated order of priority. Tenn. Code Ann.
§ 47-9-608(a)(2001). After payment of other listed obligations, the statute states that the
“secured party shall account to and pay a debtor for any surplus, and the obligor is liable for
any deficiency.” Tenn. Code Ann. § 47-9-608(a)(4)(emphasis added). However, as pointed
out by BancorpSouth, the UCC defines debtor as “a person having an interest, other than a
security interest or other lien, in the collateral . . . .” Tenn. Code Ann. § 47-9-102(28)(A).
After transferring full ownership of the collateral to 51 Concrete and Thompson, Chorley
retained no interest in it. Therefore, this argument is without merit.

For all of these reasons, we must conclude that the trial court erred in finding that it lacked
subject matter jurisdiction to adjudicate BancorpSouth’s claims against Thompson and 51
Concrete.

The trial court’s holding as to subject matter jurisdiction explicitly applied to BancorpSouth’s
claims for compensatory damages, attorney fees, and legal expenses. Although the record
is somewhat unclear as to whether the trial court held that it lacked subject matter jurisdiction

                                               -7-
as to the punitive damages claim, we presume that it did because there would be no basis for
the trial court to have subject matter jurisdiction over BancorpSouth’s claim for punitive
damages if it did not have jurisdiction over the other claims. Although it held that it lacked
subject matter jurisdiction, the trial court issued alternative rulings on BancorpSouth’s claim
for attorney fees and legal expenses, and its claim for punitive damages. In light of our
holding that the trial court in fact had subject matter jurisdiction over the entire case, we will
address the trial court’s alternative holdings on attorney fees and legal expenses, and on
punitive damages.

                                Attorney Fees and Legal Expenses

On appeal, BancorpSouth notes that the proceedings in the trial court below were bifurcated,
and it had not yet put on proof of its legal fees and expenses. However, in its final order, the
trial court held in the alternative that BancorpSouth had no basis for seeking attorney fees.
On appeal, BancorpSouth asserts that this was error.

In its alternative holding on attorney fees and reasonable legal expenses, the trial court held
that BancorpSouth was not entitled to attorney fees because neither Thompson nor 51
Concrete entered into a contract with BancorpSouth that provided for such fees, and there
was no statutory basis for an award of attorney fees. BancorpSouth argues on appeal that it
has both a statutory and contractual basis to seek an award of attorney fees and reasonable
legal expenses incurred to enforce its security interest in the proceeds from the sale of the
collateral.

As the statutory basis for its claim for attorney fees and legal expenses, BancorpSouth relies
on a provision of the UCC. Section 47-9-607(d), entitled “Collection and enforcement by
secured party,” provides: “A secured party may deduct from the collections made pursuant
to subsection (c)2 reasonable expenses of collection and enforcement, including reasonable
attorney’s fees and legal expenses incurred by the secured party.” Tenn. Code Ann. § 47-9-
607(d) (2001). The comments to this section state that the phrase “reasonable attorney’s fees
and legal expenses” includes “only those fees and expenses incurred in proceeding against
account debtors or other third parties.” Tenn. Code Ann. § 47-9-607, cmt.10. The comments
state further that the “secured party’s right to recover these expenses from collections arises
automatically under this section.” Tenn. Code Ann. § 47-9-607, cmt.10. We agree with
BancorpSouth that, in this conversion action, it may rely on these UCC provisions to seek
attorney fees and legal expenses against 51 Concrete and Thompson. See First Tenn. Prod.

2
 Subsection (c) states that “[a] secured party shall proceed in a commercially reasonable manner if the
secured party . . . undertakes to collect from or enforce an obligation of an account debtor or other person
obligated on collateral. . . .” Tenn. Code Ann. § 47-9-607(c).

                                                    -8-
Credit Assoc. v. Gold Kist Inc. 653 S.W.2d 418, 419 (Tenn. Ct. App. 1983) (action under the
UCC when plaintiff held security interest in soybean crop allegedly converted by third party
defendant purchaser); Mammoth Cave Prod. Credit Assoc. v. Oldham, 569 S.W.2d 833
(Tenn. Ct. App. 1977) (applying UCC principles in a conversion case involving secured
tobacco crops).

As the contractual basis for its claim for attorney fees and legal expenses from Thompson
and 51 Concrete, BancorpSouth relies on the security agreement executed by Chorley. The
security agreement executed by Chorley clearly states that any proceeds from collections or
disposition will be applied first to BancorpSouth’s “expenses of enforcement, which include
reasonable attorneys’ fees and legal expenses to the extent not prohibited by law. . . .” Under
Section 47-9-201, “a security agreement is effective according to its terms between the
parties, against purchasers of the collateral, and against creditors.” Tenn. Code Ann. § 47-9-
201(a) (2001). Thus, the provisions in the security agreement on attorney fees and legal
expenses would be applicable to 51 Concrete and Thompson.3 Accordingly, we must
respectfully disagree with the trial court’s alternative holding that BancorpSouth had neither
a statutory nor a contractual basis to assert a claim for attorney fees and legal expenses
expended to enforce its security interest against Thompson and 51 Concrete.

                                        Punitive Damages

On appeal, BancorpSouth argues that the evidence at trial establishes clearly and
convincingly that it is entitled to punitive damages. Hodges v. S.C. Toof & Co., 833 S.W.2d
896, 901 (Tenn. 1992); Barrett v. Vann, No. E2006-01283-COA-R3-CV, 2007 WL
2438025, at *15; 2007 Tenn. App. LEXIS 561, at *41 (Tenn. Ct. App. Aug. 29, 2007).
Thompson notes that, in light of the trial court’s finding that it did not have subject matter
jurisdiction, the trial court refrained from making findings of fact and conclusions of law on
the conversion claim, some of which might affect the trial court’s holding on punitive
damages, as well as the holding on attorney fees and legal expenses. As a result, Thompson
argues, this Court should vacate the trial court’s alternative holdings on punitive damages,
and on attorney fees and legal expenses, and remand the case to the trial court for further
proceedings on all claims. We agree with Thompson. We decline to address whether the
evidence shows that BancorpSouth is entitled to either punitive damages or attorney fees and
legal expenses, leaving these issues for the trial court on remand.




3
Thompson notes that BancorpSouth did not include a copy of the security agreement in its UCC-1 filing
with the Secretary of State. Thompson also correctly acknowledges that inclusion of the agreement in the
UCC-1 was not required to provide notice. See Tenn. Code Ann. § 47-9-502(a).

                                                  -9-
                                        C ONCLUSION


We reverse the trial court’s holding that it did not have subject matter jurisdiction over this
matter. We reverse the trial court’s holding that BancorpSouth had no basis to recover
attorney fees and legal expenses. We vacate the trial court’s holding that BancorpSouth is
not entitled to attorney fees, legal expenses or punitive damages, and direct the trial court to
reconsider these issues as part of the proceedings on remand. All other issues raised on
appeal are pretermitted.


The decision of the trial court is reversed in part, vacated in part, and remanded. Costs on
appeal are assessed equally one-half against Appellee 51 Concrete, LLC and one-half against
Appellee Thompson Machinery Commerce Corporation, for which execution may issue if
necessary.




                                                            ___________________________
                                                              HOLLY M. KIRBY, JUDGE




                                              -10-
