                     NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                                File Name: 07a0005n.06
                                 Filed: January 4, 2007

                                                    No. 06-5012

                                 UNITED STATES COURT OF APPEALS
                                      FOR THE SIXTH CIRCUIT


JPMORGAN CHASE BANK, NATIONAL                                       )
ASSOCIATION, as Trustee,                                            )
                                                                    )          ON APPEAL FROM THE
           Plaintiff-Appellant,                                     )          UNITED STATES DISTRICT
                                                                    )          COURT FOR THE MIDDLE
v.                                                                  )          DISTRICT OF TENNESSEE
                                                                    )
FIFTH THIRD BANK, N.A.,                                             )                    OPINION
                                                                    )
           Defendant-Appellee.                                      )




BEFORE: NORRIS, COLE, and COOK, Circuit Judges.

           ALAN E. NORRIS, Circuit Judge. This diversity action involves a dispute between two

banks: Franklin National Bank (“FNB”)1 and JPMorgan Chase Bank, National Association

(“Chase”). Each bank made loans to Michael E. Redick, who sought funding for his new business,

Fan-A-Mania Sports, Inc. Unfortunately for all involved, the business did not thrive. Because both

banks hold a deed of trust securing the loans with the same piece of real property, we must decide

which takes priority.

           The district court determined that the deed of trust held by FNB, which was recorded first,

took priority because it included a provision for future obligatory advances and, pursuant to

Tennessee law, was not released even though the outstanding balance on the promissory note secured

     1
         FNB has since merged with Fifth Third Bank, N.A., which is named as defendant in this action.
No. 06-5012
JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

by FNB’s deed of trust was paid in full at the time Redick entered into a subsequent deed of trust

with Chase. Accordingly, it granted summary judgment to FNB. Because we conclude that the deed

of trust held by FNB provided for optional rather than obligatory advances and that FNB had “actual

notice” of Chase’s intervening deed of trust at the time that it authorized further advances or loans

to Redick, we vacate the judgment of the district court and remand this matter with instructions that

Fifth Third release the deed of trust secured by the disputed property.

                                                 I.

       It would be an understatement to say that this case illustrates how not to enter into

commercial transactions. At virtually every turn, representatives of both parties made business

decisions based upon an incomplete understanding of the factual and legal landscape, failed to follow

up when confronted by information that should have raised concerns, and generally proceeded based

upon assumptions that proved to be misguided. However, because our holding is grounded on the

language of the deeds of trust and their accompanying promissory notes rather than upon the

circumstances surrounding their negotiation, a lengthy factual recitation is unnecessary. As always,

we review grants of summary judgment de novo. Bender v. Hecht’s Dep’t Stores, 455 F.3d 612, 619

(6th Cir. 2006).

       Redick founded Fan-A-Mania, which sold sports-related items, in January 2002. On March

5, 2002, he signed a “Deed of Trust for Commercial Purposes” in favor of FNB as beneficiary with

John T. Flaugher serving as trustee. It was recorded in Williamson County two days later. The deed

of trust explicitly states that it “SECURES OBLIGATORY ADVANCES MADE FOR

COMMERCIAL PURPOSES”; this statement is underscored in the following paragraph:

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No. 06-5012
JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

                  12. Future Advances. Upon request of Borrower(s), Lender, prior to release
         of this Deed of Trust, may make future advances to Borrower(s) . . . up to the original
         amount of the Note or the maximum amount secured hereby, whichever is greater.
         Such future advances, with interest thereon, shall be secured by this Deed of Trust
         unless the parties shall agree otherwise in writing.

The deed of trust also adopted the definition of “obligatory advances” found in Tenn. Code Ann. §

47-28-101. As collateral, Redick offered his unencumbered home at 227 Lancelot Lane in Franklin,

Tennessee.

         In addition to the deed of trust, Redick signed a related promissory note in the amount of

$125,000 that was a “working capital line of credit for seasonal business.” It provided for interest-

only payments beginning on April 5, 2002 and a final payment of the entire amount of principal plus

accrued interest by March 5, 2003. Redick borrowed the entire $125,000 for inventory.

         Redick had assured the FNB loan officer who approved the loan that the note would be paid

off by a private loan from his brother. However, his brother did not follow through and therefore

Redick decided to sell his house for $280,000 and use part of the proceeds to repay FNB the

outstanding balance of $125,000.

         On the day his house was due to sell, the buyer backed out. However, Redick had already

signed a contract to buy another house at 202 Golden Leaf Court in Franklin. His mortgage broker

arranged financing for him through Franklin Mortgage Funding, Inc.2 On April 15, 2002, Redick

closed at Serenity Title & Escrow LLC (“Serenity Title”) on three loans: two secured by 227

Lancelot and one secured by 202 Golden Leaf. The latter is not at issue in this appeal.



   2
       Despite similar names, Franklin Mortgage and FNB are in no way affiliated.

                                                       -3-
No. 06-5012
JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

       Redick signed two adjustable rate promissory notes and two deeds of trust in favor of

Franklin Mortgage. The first note was made in the amount of $218,400, and was secured by a deed

of trust recorded on April 22, 2002. The second note was for $54,600 and was secured by the second

deed of trust, which was likewise recorded. The deed of trust securing the $218,400 loan was

assigned to Chase and sent to its servicing company. The loan for $54,600 was assigned to Popular

Financial Services LLC, which is not affiliated with Chase. Thus, this appeal only concerns the

priority between the deed of trust held by FNB and the deed of trust in the amount of $218,400 held

by Chase, which was recorded approximately a month later.

       Kimberly Parker, who worked for Serenity Title, served as the closing agent for Franklin

Mortgage. Franklin Mortgage instructed her to satisfy the $125,000 balance due on the deed of trust

held by FNB and to obtain a release from FNB so that Franklin Mortgage would be in the first lien

position with respect to the Lancelot property. Parker duly called FNB and learned that the payoff

amount was $125,998.06. The next day, April 16, FNB faxed Parker a written payoff statement.

The box on the form indicating that the loan was a line of credit was not checked. Based on this

information, Serenity Title sent a check to FNB for $125,998.06, which was stapled to the written

payoff statement. Hence, at this point, Franklin Mortgage believed that its deed of trust constituted

the first lien against the Lancelot property.

       In May 2002, Redick approached FNB for additional funds. A lending officer’s report dated

May 10 identified inventory and equipment owned by Fan-A-Mania as collateral for a new $50,000

loan, which Redick received on May 24. The report made no mention of the deed of trust, however.

Once approved, Redick signed another promissory note with terms similar to the March 5, 2002

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No. 06-5012
JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

note.

        On August 6, 2002, Redick requested another loan, this time in the amount of $100,000. FNB

consolidated this loan with the $50,000 loan of May 24. The loan officer’s report identified the

collateral as $216,985 in inventory and equipment. Uncertain about the status of the deed of trust

on the Lancelot property, the FNB loan officer and her supervisor spoke to trustee John Flauger.

According to the loan officer’s report, they then decided to secure the new loan with a second deed

of trust in “an abundance of caution.”

        Attorney David McMackin handled the August 19 closing on the $100,000 loan. A title

search that he requested on the Lancelot property continued to show FNB’s March 5, 2002 deed of

trust as a first lien and Franklin Mortgage’s two mortgages as second and third liens. However,

McMackin mistakenly believed that FNB and Franklin Mortgage were the same entity.

        Regardless, FNB ultimately loaned $100,000 to Fan-A-Mania. A new deed of trust in favor

of FNB was recorded and noted that the property was encumbered by the current year’s real estate

taxes and “a first mortgage” to Franklin Mortgage in the principal sum of $218,400. The title

insurance policy excepted from coverage Franklin Mortgage’s first and second deeds of trust.

        On May 29, 2003, Chase’s substitute trustee under the first Franklin Mortgage deed of trust

advised FNB – which it assumed to be a junior lienholder under its August deed of trust – of the

bank’s intent to foreclose. At this point, counsel for FNB informed Chase that it held a prior deed

of trust.

        On July 15, 2003, Fan-A-Mania filed a Chapter 7 bankruptcy petition. At this time,

approximately $50,000 remained on the debt to FNB, which obtained emergency relief from the

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No. 06-5012
JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

automatic stay to foreclose under the March 2002 deed of trust.

        Chase responded with a civil action in Tennessee Chancery Court against FNB. After

summary judgment motions were denied, Chase voluntarily dismissed that action in January 2005.

Later that month it initiated this suit in federal court. The district court granted summary judgment

in favor of Fifth Third Bank, which had merged with FNB. The court reasoned as follows:

                FNB’s recorded March 5, 2002 Deed of Trust extended a line of credit for
        future advances to Redick for commercial purposes under these [Tennessee] statutes.
        FNB and Redick agreed, and intended, in both the dragnet clause[3] and in paragraph
        23 of the Deed of Trust that all advances made by FNB were “obligatory advances”
        under the statutes cited above. . . .

                 Under Tenn. Code Ann. § 47-28-101(6), FNB could, and did, require Redick
        to pay off the first $125,000 advance before FNB made a second advance of $50,000
        in May 2002. FNB could, and did, rely on the March 2002 Deed of Trust to secure
        the May 2002 advance because § 47-28-102 states a commercial mortgage can be
        used to secure future advances “even though no indebtedness is outstanding at the
        time any advance is made.” When FNB made the second $50,000 advance in May
        2002, Redick had no outstanding indebtedness to FNB, yet the March 5, 2002 Deed
        of Trust had not been released and secured the $50,000 advance. Likewise, under
        statute, FNB could advance $100,000 to Redick in August 2002, and still be secured
        by the March 2002 Deed of Trust.

JP Morgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A., No. 3:05-0079, slip op. at 23-24 (M.D.

Tenn. Nov. 1, 2005) (footnote and citations omitted). The district court subsequently denied Chase’s

motion to alter or amend judgment.

                                                        II.



   3
      “[A] dragnet clause is a mortgage provision which purports to make the real estate security for other,
usually unspecified, debts which the mortgagor may already owe or may owe in the future to the mortgagee.”
Commerce Fed. Sav. Bank v. Fed. Deposit Ins. Corp., 872 F.2d 1240, 1242 n.2 (6th Cir. 1989) (quoting G.
Osborne, G. Nelson, D. W hitman, Real Estate Finance Law § 12.8 at 772 (1st ed. 1979)).

                                                       -6-
No. 06-5012
JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

       While the district court correctly notes that the deed of trust held by FNB unequivocally

states that it “secures obligatory advances made for commercial purposes,” a reading of the entire

document leads us to conclude that it contemplates optional, not obligatory, advances. Obligatory

advances are defined by statute as follows:

       “Obligatory advance” means an advance which the creditor is required to make by
       agreement with the borrower, whether or not a subsequent event beyond the control
       of the creditor may allow the creditor to cancel the obligation to make such advance.
       Advances shall be deemed obligatory, even though made pursuant to a credit
       agreement or mortgage containing some or all of the following provisions:

               (A) The right of the creditor to withhold advances on the occurrence
               of a default until the default is cured, if such default is curable under
               the terms of the agreement;

               (B) The inclusion of a stated or objectively ascertainable date on
               which the obligation to make further advances ends;

               (C) Requirements for procedures to be followed by the borrower to
               activate the obligation to make advances;

               (D) In the case of an open-end mortgage, the right of the creditor, on
               notice to the borrower, to reduce the credit limit, or to withhold
               advances, because of a decrease in the value of the collateral or an
               adverse change in the borrower's credit worthiness; and

               (E) In the case of an open-end mortgage, the right of the creditor, on
               notice to the borrower, to cancel the obligation to make further
               advances thereunder on grounds stated in the open-end credit
               agreement or mortgage . . . .

Tenn. Code Ann. § 47-28-101(a)(6). “Optional advances” are defined simply as “any advance which

is not obligatory.” Tenn. Code Ann. § 47-28-101(a)(9).

       Because the balance owing on the March 2002 promissory note had been paid off at the time

Chase recorded its deed of trust, the following statutory provision is of importance:

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No. 06-5012
JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

       A mortgage may provide that it secures not only existing indebtednesses or advances
       made contemporaneously with the execution thereof, but also future advances,
       whether obligatory, or optional, or both, and whether made under open-end credit
       agreements or otherwise, to the same extent as if such future advances were made
       contemporaneously with the execution of the mortgage, even though no advance is
       made at the time of the execution of the mortgage and even though no indebtedness
       is outstanding at the time any advance is made.

Tenn. Code Ann. § 47-28-102. Moreover, “advances relate back to the time of the recording of the

mortgage [deed of trust], and are prior and superior to subsequent encumbrances and conveyances”

if they are obligatory. Tenn. Code Ann. § 47-28-103(a). When advances are optional, however, a

slightly different analysis determines priority:

       Optional advances made under any mortgage securing future advances, other than an
       open-end mortgage, are superior in priority to any intervening conveyance or
       encumbrance unless the mortgagee has actual notice of the intervening conveyance
       or encumbrance prior to exercising the mortgagee’s option to make the advance. For
       the purpose of this subsection, “actual notice” means knowledge in fact from any
       source by any means.

Tenn. Code Ann. § 47-28-103(c).

       With this statutory scheme in mind, we turn to the language contained in the March deed of

trust and the related promissory note in order to determine whether the advances contemplated are

obligatory or optional. We begin by observing that the mere fact that the deed of trust states that it

“secures obligatory advances made for commercial purposes” does not necessarily end our inquiry

if the underlying terms of the deed and note, which is incorporated by reference, are at odds with that

characterization.

       The promissory note is styled a “Commercial Variable Rate Revolving or Draw Note,”

which is described as follows:



                                                   -8-
No. 06-5012
JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

        REVOLVING OR DRAW FEATURE:_X_ This Note possesses a revolving feature.
        Upon satisfaction of the conditions set forth in this Note, Borrower shall be entitled
        to borrow up to the full principal amount of the Note and to repay and reborrow from
        time to time during the term of this Note. ___This Note possesses a draw feature.
        Upon satisfaction of the conditions set forth in this Note, Borrower shall be entitled
        to draw one or more times under this Note. Any repayment may not be reborrowed.
        The aggregate amount of such draws shall not exceed the full principal amount of
        this Note.

The note signed by Redick checked the revolving feature, which would appear to be consistent with

FNB’s position that any advances were obligatory since it provides that the borrower is “entitled”

to advances against the full principal amount of the loan. However, the revolving feature is further

defined by the following condition:

        CONDITIONS FOR ADVANCES: If no Event of Default has occurred under this
        Note, Borrower shall be entitled to borrow monies under this Note (subject to the
        limitations described above) under the following conditions:

                OFFICER APPROVAL ON EACH DRAW REQUEST

The condition that future advances on the note require officer approval obviously undercuts the

notion that such advances are obligatory since the borrower is only entitled to advances contingent

upon approval by a bank representative. Also, as quoted earlier, the paragraph in the deed of trust

defining future advances contains the following sentence: “Upon request of Borrower(s), Lender,

prior to release of this Deed of Trust, may make future advances to Borrower(s) . . . up to the original

amount of the Note or the maximum amount secured hereby, whichever is greater.” The use of

“may” rather than “shall” in this context further supports the view that any advances are optional

rather than obligatory. Further, the use of “may” is certainly at odds with the statutory definition of

obligatory advances, which defines the term as “an advance which the creditor is required to make



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JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

by agreement with the borrower, whether or not a subsequent event beyond the control of the creditor

may allow the creditor to cancel the obligation to make such advance.” Tenn. Code Ann. § 47-28-

101(a)(6) (emphasis added). Admittedly, the deed of trust’s final paragraph states that “[t]he

Borrower(s) and the Lender acknowledge that advances under the Note, and any extensions or

renewals thereof, are Obligatory Advances.” However, as always, the specific governs the general,

and if advances are contingent upon bank approval, they are not obligatory. See generally 11

Williston on Contracts § 32:10 (4th ed.).

        Having concluded that the advances at issue are optional, the priority of the March deed of

trust hinges on whether FNB had “actual notice of the intervening conveyance or encumbrance prior

to exercising the mortgagee’s option to make the advance.” Tenn. Code Ann. § 47-28-103(c). In

other words, when it advanced Redick additional funds in August,4 did the bank have actual notice

of the deed of trust held by Chase? We conclude that it did. Attorney McMackin’s title search,

undertaken on behalf of FNB, revealed the two Franklin Mortgage deeds of trust and he made

marginal entries indicating as much. Under fundamental agency principles, knowledge acquired by

an attorney may be imputed to his client. Winstead v. First Tennessee Bank, N.A., Memphis, 709

S.W.2d 627, 631-32 (Tenn. App. 1986) (citing Goodbar v. Union & Planters’ Bank & Trust Co., 67

S.W.2d 562 (Tenn. App. 1933)). In this instance, McMackin learned of intervening encumbrances

on the real property at issue and that knowledge may fairly be imputed to FNB.

        In sum, we conclude that the March deed of trust and the related promissory note, despite



   4
    W e focus exclusively on the August loan because the May loan of $50,000 was paid off as part of the
August loan.

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JPMorgan Chase, Nat’l Assn. V. Fifth Third Bank, N.A.

statements to the contrary, clearly provide for optional advances inasmuch as they are contingent on

the approval of an FNB officer. Furthermore, FNB had actual notice of the deed of trust now held

by Chase at the time it made the August loan to Redick. Under these circumstances, the deed of trust

held by Chase has a priority interest in the Lancelot real property.

                                                III.

       The judgment of the district court is reversed and the cause remanded with instructions that

Fifth Third release its March 2002 deed of trust.




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