                NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 07a0306n.06
                              Filed: May 2, 2007

                                           No. 06-5502

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT


P RO VIDEN T BANK D BA                  P C FS    )
MORTGAGE RESOURCES,                               )
                                                  )
       Plaintiff-Appellant,                       )
                                                  )
v.                                                )   ON APPEAL FROM THE UNITED
                                                  )   STATES DISTRICT COURT FOR THE
TENNESSEE FARMERS                  MUTUAL         )   WESTERN DISTRICT OF TENNESSEE
INSURANCE COMPANY,                                )
                                                  )
       Defendant-Appellee.                        )




       Before: SILER, GIBBONS, and ROGERS, Circuit Judges.
       ROGERS, Circuit Judge. Robert and Julie Mathis obtained a mortgage on their house from

Plaintiff-Appellant Provident Bank (“the Bank”) and insured the house with Defendant-Appellee

Tennessee Farmers Mutual Insurance Company (“TFM”) against, among other things, the risk of loss

from fire. The insurance policy named the Bank as an insured. The Bank initiated foreclosure

proceedings against the Mathises, but those proceedings were stayed because the Mathises filed a

voluntary petition for bankruptcy. Subsequently, the Mathises’ house burned to the ground. TFM

refused to pay the Bank’s claim, arguing that the Bank failed to comply with a provision of the

insurance agreement, which stated that “[i]f [TFM] den[ies] an insured’s claim, that denial shall not

apply to a valid claim of the mortgagee, if the mortgagee . . . has notified us . . . of any . . .

foreclosure . . . of which the mortgagee was aware prior to loss.” JA 90. The Bank sued, arguing
No. 06-5502
Provident Bank v. Tennessee Farmers Mutual Insurance Company

that (1) the term “foreclosure” in the insurance contract was ambiguous; and (2) a Tennessee statute

which states that a mortgagee’s claim for insurance “shall not be invalidated . . . by any foreclosure,”

Tenn. Code Ann. § 56-7-804, prohibited TFM from invalidating the Bank’s insurance claim on the

grounds that the Bank failed to notify TFM of the initiation of foreclosure proceedings. The district

court ruled in favor of TFM on cross-motions for summary judgment.


        Because the term “foreclosure” in the insurance contract is ambiguous, and, therefore,

genuine issues of material fact still exist as to the meaning of the contract, we reverse and remand

the case to the district court.


                                            Background


        The complaint alleges the following facts, which are not disputed:


        On or about October 15, 1999, Robert Mathis obtained a residential mortgage loan from the

Bank in the amount of $176,800. Mathis and his wife pledged their house as collateral for the loan.

Pursuant to the loan requirements, the Mathises obtained a homeowners insurance policy from TFM.

That policy provided coverage against, among other things, the risk of loss from fire. The Bank was

the insured mortgagee under the policy pursuant to a standard insured-mortgagee clause.


        After the Mathises became delinquent in their mortgage payments, the Bank initiated

foreclosure proceedings. By a letter dated March 5, 2002, the Bank referred the Mathises’ loan to

the firm of Tatum & Jones for foreclosure. On March 13, 2002, the Bank published in the local


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No. 06-5502
Provident Bank v. Tennessee Farmers Mutual Insurance Company

newspaper notice of its intent to foreclose on the Mathises’ house on June 6, 2002. By a letter dated

March 21, 2002, Tatum & Jones notified the Mathises that it was beginning legal work to foreclose

on their house. Tatum & Jones also appointed a substitute trustee, executed a title search on the

property, and prepared an advertisement for the foreclosure sale. The Bank did not notify TFM that

it had initiated foreclosure proceedings against the Mathises.


       On March 22, 2002, the Mathises filed a joint voluntary petition for bankruptcy with the

Bankruptcy Court for the Western District of Tennessee. Foreclosure proceedings ceased pursuant

to the automatic stay under 11 U.S.C. § 362. On July 9, 2002, the Bankruptcy Court discharged the

Mathises’ bankruptcy.1


       On August 9, 2002, the Mathises’ house was destroyed by fire. The house was a total loss,

and the Mathises submitted a claim for benefits under the TFM insurance policy. The Bank, being

owed the principal balance of the loan of $175,308.95 (as of December 31, 2003), also submitted

a claim for benefits, which TFM refused to pay. TFM stated that it refused to pay the Bank’s claim

because (1) the Bank failed to notify TFM that it was foreclosing on the Mathises’ mortgage, as




       1
       Subsequently, on September 10, 2002, Julie Mathis filed another voluntary petition for
bankruptcy, which was dismissed by the Bankruptcy Court on October 9, 2002.

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Provident Bank v. Tennessee Farmers Mutual Insurance Company

required by the insurance contract,2 and (2) the Bank failed to provide certain documentation to

TFM.


       The Bank, an Ohio citizen, brought a diversity suit against TFM, a Tennessee citizen, in the

United States District Court for the Western District of Tennessee for breach of contract, bad faith

refusal to pay under Tennessee Code § 56-7-105(a), and violation of the Tennessee Consumer

Protection Act, §§ 47-18-101 et seq. The Bank moved for partial summary judgment, arguing that

Tennessee Code section 56-7-804 prohibits an insurer from invalidating a claim because of the

mortgagee’s foreclosure on the insured property. TFM responded and moved for summary

judgment, arguing that the Bank violated the terms of the insurance contract by not notifying TFM

prior to foreclosing on the Mathises’ house. The district court granted TFM’s motion and denied

the Bank’s motion.


       The district court first held that “the initiation of foreclosure proceedings is tantamount to

‘foreclosure’ within the meaning of [Tennessee Code section 56-7-804] and the insurance policy”

such that the Bank “had a duty to notify [TFM] of the initiation of [the foreclosure] proceedings

under the insurance policy.” JA 314. The court also held that the initiation of foreclosure




       2
         Because TFM (presumably) denied the Mathises’ claim, the Bank could only recover under
the insurance contract if it complied with the standard insured-mortgagee clause by, among other
things, giving notice to TFM prior to any foreclosure of which the Bank was aware prior to the fire.
See JA 90.

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Provident Bank v. Tennessee Farmers Mutual Insurance Company

proceedings did not increase the risk of hazard under Tennessee Code section 56-7-804.3 As relevant

here, section 56-7-804 protects a mortgagee from having an insurance claim invalidated because of

acts taken by a mortgagor that result in the invalidation of the mortgagor’s insurance coverage (e.g.,

where a mortgagor’s insurance is voided because of change of ownership, the insurer cannot

invalidate the mortgagee’s claim if the mortgagee did not know about the change of ownership). The

court also held that the insurance policy’s notification requirement was not void under section 56-7-

804 because parties may contract around the protection of that section. Finally, the district court held

that the policy’s reference to “foreclosure” was not ambiguous.


        The Bank timely filed a notice of appeal.


                                           Standard of Review




        3
            That provision states, in relevant part:

        When any person shall, as trustee, mortgagee, assignee, or otherwise, possess or have
        any fire insurance policy on realty made payable to such person, or other person as
        that person’s interest may appear, then such insurance as to the interest of the trustee,
        mortgagee, assignee or other person therein named shall not be invalidated by an act
        or neglect of the mortgagor owner of the property so insured, nor by any foreclosure
        or other proceedings or notice of sale relating to the property, nor by change in title
        or ownership of the property, nor by occupation of the premises for purposes more
        hazardous than are permitted by such policy; . . . and provided further, that the
        mortgagee, trustee, assignee, or other such person shall notify the insurance company
        of any change of ownership or occupancy or increase of hazard which shall come to
        the knowledge of the mortgagee, trustee, assignee, or other such person . . . .

Tenn. Code. Ann. § 56-7-804.

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Provident Bank v. Tennessee Farmers Mutual Insurance Company

        This court reviews the district court’s order granting summary judgment de novo. State Farm

Fire & Cas. Co. v. McGowan, 421 F.3d 433, 436 (6th Cir. 2005).


                                                Analysis


        TFM was not entitled to summary judgment because the term “foreclosure” in the insurance

contract is ambiguous. The insurance contract states, in relevant part, that “[i]f [TFM] den[ies] an

insured’s claim, that denial shall not apply to a valid claim of the mortgagee, if the mortgagee . . .

has notified us prior to loss of any breach of warranty, foreclosure, change of ownership, occupancy,

or substantial change of risk of which the mortgagee was aware prior to loss.” JA 90. TFM argues

that foreclosure is a process, and therefore, the Bank should have given notice before the beginning

of that process. The Bank concedes that foreclosure is a process but argues that the word

“foreclosure” is ambiguous because it can refer either to the beginning or end of the foreclosure

process. The district court concluded that “foreclosure” is a process that occurs pursuant to several

steps and thus “prior to foreclosure” means prior to the beginning of the foreclosure process.


        On the one hand, there are several arguments for why “foreclosure” should be interpreted to

mean the beginning of foreclosure proceedings. First, the contract required the Bank to notify TFM

“prior to . . . foreclosure,” JA 90, which, if foreclosure is a process (as both parties agree), naturally

means prior to the beginning of foreclosure proceedings. For example, if one says “let’s eat prior

to the baseball game,” the hungry person ordinarily does not mean “let’s eat before the baseball game

is finished,” but instead, “let’s eat before the baseball game begins.” Also, if “prior to foreclosure”


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No. 06-5502
Provident Bank v. Tennessee Farmers Mutual Insurance Company

meant “prior to the end of foreclosure proceedings,” as the Bank insists, the phrase would have the

strange meaning of “prior to some but not all of the foreclosure proceedings.” TFM’s reading results

in the phrase meaning “prior to all foreclosure proceedings”—a meaning more consistent with the

natural reading of the phrase.


       Second, reading “prior to foreclosure” to mean “prior to the beginning of foreclosure

proceedings” is more consistent with the apparent purpose of the contract provision, as suggested

by the contract itself. The contract contains a list of events prior to which a mortgagee must notify

TFM: “any breach of warranty, foreclosure, change of ownership, occupancy, or substantial change

of risk.” JA 90. These terms all share a potential increase of risk to TFM. What creates the

substantial change of risk during foreclosure proceedings is the mortgagor’s incentive to destroy the

house intentionally to receive the proceeds of the insurance policy. This risk begins with the

initiation of foreclosure proceedings and ends when the foreclosure process is complete. Thus, it

makes sense that TFM would desire notice at the beginning of foreclosure proceedings, not at the

end.


       Finally, reading “foreclosure” to require notice prior to the end of foreclosure proceedings

would read a redundancy into the contract. The insurance contract separately lists “change of

ownership” as an event requiring notice to TFM, and the end of foreclosure includes a change of

ownership.




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Provident Bank v. Tennessee Farmers Mutual Insurance Company

        On the other hand, there are also arguments for why “prior to foreclosure” should be

interpreted to mean prior to the end of the foreclosure process. The word “foreclosure” sometimes

refers simply to a foreclosure sale. TFM admitted as much at oral argument, agreeing that even

lawyers sometimes refer to a foreclosure sale as “foreclosure.” Similarly, there is statutory authority

for such usage. For example, the Tennessee Code provides that “[i]n any sale of land to foreclose

a deed of trust, mortgage, or other lien securing the payment of money or other thing of value, the

trustee or person or entity holding a similar position may attend the foreclosure either in person or

by an agent.” Tenn. Code Ann. § 35-5-114. Also, the title to that provision is “Trustee’s attendance

at foreclosure.” It is clear that “foreclosure” as used in this statute refers not to the initiation of

foreclosure proceedings, but to the foreclosure sale. Thus, “foreclosure” is capable of two reasonable

interpretations and therefore is ambiguous. See Tata v. Nichols, 848 S.W.2d 649, 650 (Tenn. 1993)

(“Where language in an insurance policy is susceptible of more than one reasonable interpretation

. . . it is ambiguous.”).4


        Although Tennessee insurance law states that “[w]here . . . ambiguous language limits the

coverage of an insurance policy, that language must be construed against the insurance company and

in favor of the insured,” id., the Bank did not seek summary judgment on the issue of the meaning

of the contract. It is therefore necessary only to reverse the district court’s order granting summary



        4
         TFM’s argument that the Bank “is estopped from claiming that the terms of the mortgagee
clause are ambiguous” because the Bank “never obtained a copy of the insurance policy” is without
merit. TFM does not refer this court to any authority suggesting that an insured cannot collect under
a valid insurance policy because the insured never obtained a copy of that policy.

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No. 06-5502
Provident Bank v. Tennessee Farmers Mutual Insurance Company

judgment to TFM on the meaning of the contract because there exist, at a minimum, genuine issues

of material fact as to the meaning of the contract, and remand the case for further proceedings.


       If on remand the court determines that the Bank has met the notice requirement of the

contract, it will not be necessary for the court to address the further question of whether Tennessee

Code section 56-7-804 prohibits TFM from invalidating the Bank’s claim. The district court held

that the Bank contracted away any protection that section 56-7-804 might have provided, but the

court did so based on the questionable premise that the Bank had contracted away the protection of

a statutory provision that mandated that very contract provision. Contractual provisions mandated

by statute cannot ordinarily be contracted around by the parties. See Hermitage Health & Life Ins.

Co. v. Cagle, 420 S.W.2d 591, 594 (Tenn. Ct. App. 1967) (“It is a well established rule of law in this

state that any statute applicable to an insurance policy becomes part of the policy and such statutory

provisions override and supersede anything in the policy repugnant to the provisions of the statute.”

(citing Johnson Transfer & Freight Lines v. Am. Nat’l Fire Ins. Co., 79 S.W.2d 587, 589 (Tenn.

1935)); see also 2 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 19:2 (3d ed. updated

2006). Neither TFM nor the district court cites authority for the power of the parties to contract out

of the protections of section 56-7-804, and there is nothing in the language of this particular statute

suggesting that parties may do so. In reversing, however, we do not rely in the alternative on section

56-7-804 to hold that the contractual language at issue is statutorily precluded from requiring notice

in this case. There is a preliminary legal question that would have to be resolved in order to reach

that conclusion, and the district court did not address it. Tennessee Code section 56-7-804 protects


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Provident Bank v. Tennessee Farmers Mutual Insurance Company

against invalidation based on “any foreclosure,” and some interpretation is required to extend the

protection to invalidation based on lack of notice of a foreclosure. We therefore decline to resolve

the issue today.


       The judgment of the district court is reversed and remanded for proceedings consistent with

this opinion.




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