                 IN THE COURT OF APPEALS OF TENNESSEE
                            AT KNOXVILLE
                                  February 14, 2001 Session

        FIRST CITIZENS BANK OF CLEVELAND v. CAROL CROSS

                     Appeal from the Chancery Court for Bradley County
                          No. 96-266   Jerri S. Bryant, Chancellor

                                     FILED MARCH 20, 2001

                                 No. E2000-01325-COA-R3-CV


This is the second time that this case has been before us on appeal. The case originated as a suit on
two promissory notes executed by the defendant in favor of the plaintiff and secured by deeds of trust
on real property owned by the defendant. The defendant filed a pleading incorporating a
counterclaim, and a third-party complaint against one of the plaintiff’s employees, which pleading
alleges that the plaintiff, through its employee, breached its undertaking to arrange for additional
insurance coverage on the mortgaged property. On the first appeal, this Court held that the trial court
erred in denying the defendant’s request for a jury trial. On remand, the plaintiff and the third-party
defendant moved for summary judgment on the ground that the parol evidence rule bars
consideration of the defendant’s claim that the plaintiff, through its employee, agreed to contact the
agent for the insurance company and arrange for additional insurance on the mortgaged property.
The trial court granted the movants summary judgment and, upon confirmation of a Master’s report
as to the amounts due under the notes, entered a judgment against the defendant. The defendant
appeals. We affirm the trial court’s grant of summary judgment to the plaintiff on the promissory
notes; however, we vacate the grant of summary judgment as to the defendant’s counterclaim and
third-party complaint.

          Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
                    Affirmed in Part; Vacated in Part; Case Remanded

CHARLES D. SUSANO, JR., J., delivered the opinion of the court, in which HOUSTON M. GODDARD ,
P.J., and HERSCHEL P. FRANKS , J., joined.

Richard A. Fisher, Cleveland, Tennessee, for the appellant, Carol Cross.

Roger E. Jenne, Cleveland, Tennessee, for the appellees, First Citizens Bank of Cleveland and Larry
McSpadden.

                                             OPINION
                                                             I.

       The plaintiff, First Citizens Bank of Cleveland (“the Bank”), brought this action seeking to
recover the balance due on two promissory notes – one dated February 28, 1996, in the amount of
$200,976 and one dated March 18, 1996, in the amount of $6,342.501 – executed by the defendant,
Carol Cross, and secured by deeds of trust on real property owned by Cross.

        Cross initially borrowed $140,000 from the Bank in order to construct a lake-front house.
During construction, the house was destroyed by fire. Cross had the house insured for the full
amount of the loan. Cross began construction of another house under the same loan. On February
28, 1996, Cross borrowed an additional $75,676.55 from the Bank to complete construction. The
closing agent for the Bank was its employee, Larry McSpadden. At the closing, Cross executed a
promissory note in the amount of $200,976, which represented the remainder of her original
obligation plus the new advance. In addition to executing the promissory note, Cross executed a
security agreement, a deed of trust, and a document referred to as a “Borrower’s Agreement to
Provide Insurance” (“borrower’s agreement”) (collectively “the mortgage documents”). The security
agreement provides, in pertinent part, as follows:

                   INSURANCE – I agree to buy insurance on the property against the
                   risks and for the amounts you require and to furnish you continuing
                   proof of coverage. I will have the insurance company name you as
                   loss payee on any such policy. You may require added security if you
                   agree that insurance proceeds may be used to repair or replace the
                   property. I will buy insurance from a firm licensed to do business in
                   the state where you are located. The firm will be reasonably
                   acceptable to you. The insurance will last until the property is
                   released from this agreement. If I fail to buy or maintain the
                   insurance (or fail to name you as loss payee) you may purchase it
                   yourself.

The deed of trust provides, in pertinent part, as follows:

                   Insurance. Borrower will keep the property insured under terms
                   acceptable to Lender at Borrower’s expense and for Lender’s benefit.
                   All insurance policies shall include a standard mortgage clause in
                   favor of Lender. Lender will be named as loss payee or as the insured
                   on any such insurance policy. Any insurance proceeds may be
                   applied, within Lender’s discretion, to either the restoration or repair
                   of the damaged property or to the secured debt. If Lender requires



         1
          The record does not reflect the n ature of the tran saction that gav e rise to the sma ller note; how ever, it was
apparently related to the construction of the defendant’s house.

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               mortgage insurance, Borrower agrees to maintain such insurance for
               as long as Lender requires.

(Bold print in original.) The borrower’s agreement provides, in pertinent part, as follows:

               Section 1: Agreement to Provide Insurance: As part of my loan,
               lease, or contract, I agree:
               (1) to insure the property and/or the persons listed in section 2 with
               the coverages shown in section 3 below;
               (2) to have you named on the policy, with the “status” listed below;
               (3) to arrange for the insurance company to notify you that the policy
               is in effect and your status has been noted;
               (4) to pay for this insurance, including any fee for this endorsement;
               (5) to keep the insurance in effect until the debts listed above, and any
               other debts which now or later may be secured by the property, are
               paid. (I understand that the property may secure debts in addition to
               any listed above.)
               If I Default: If I fail to keep one or more of these promises:
               (1) I agree that you may (but are not required to) buy insurance to
               protect your interest and add the cost to what I owe you.
               (2) I also understand that I may be in default on the underlying debts,
               and that you may decide to invoke other remedies available to you for
               such default as well.

(Bold print in original.)

         On March 1, 1996, Cross’ unfinished house was completely destroyed by fire. At the time
of the fire, no additional insurance had been procured to cover the increase in the amount of the loan,
and the insurance proceeds were insufficient to pay all of the indebtedness owed by Cross to the
Bank.

        The Bank brought this action, seeking to recover on the promissory notes executed by Cross.
Cross filed a counterclaim against the Bank and a third-party complaint against Larry McSpadden,
alleging that McSpadden, acting as an agent for the Bank, had agreed to notify the agent for the
insurance company that Cross’ indebtedness would be increased and that additional insurance would
be required.

        This matter was originally heard at a bench trial. Following the conclusion of the proof, the
trial court entered a judgment against Cross and dismissed the counterclaim and third-party
complaint. On appeal, this Court reversed, finding that the trial court erred in refusing to grant
Cross’ request for a jury trial. See First Citizens Bank of Cleveland v. Cross, C/A No. 03A01-9806-
CH-00203, 1999 WL 76079 (Tenn. Ct. App. E.S., filed January 28, 1999). On remand, both the
Bank and McSpadden filed motions for summary judgment on the basis that the parol evidence rule


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bars consideration of Cross’ allegation of an oral agreement to the effect that the Bank would arrange
for additional insurance on Cross’ behalf. Along with its motion, the Bank submitted a statement
of undisputed facts, with citations to the affidavits of McSpadden and the Bank’s loan officer,
Cynthia Finnell, as well as Cross’ testimony at the bench trial. McSpadden also submitted a
statement of undisputed facts, relying upon his affidavit and Cross’ testimony.

        McSpadden states in his affidavit that in his capacity as a loan closing officer with the Bank,
he closed the loan transaction with Cross on February 28, 1996, pursuant to which Cross executed
the aforementioned mortgage documents, which were attached as exhibits to his affidavit. Cythnia
Finnell, assistant vice president of the Bank, states in her affidavit that in her capacity as a loan
officer, she approved the loan to Cross. She further states that after insurance proceeds of
$121,648.59 were applied as a credit to Cross’ obligations, the amount owed in principal and accrued
interest as of January 19, 1998, on the notes was $78,135.32. The Bank and McSpadden also cited
Cross’ testimony at the prior bench trial, in which Cross acknowledged that it was her obligation to
keep the property insured for the full amount of the loans.

       The trial court granted both motions for summary judgment. The matter was referred to a
Master for a determination of the outstanding balance owed by Cross to the Bank. The Master’s
report was filed and no exceptions or objections were made to it. The trial court confirmed the
Master’s report and entered a judgment against Cross for $11,349.06, being the amount due after a
foreclosure on the Bank’s security. This appeal followed.

                                                  II.

        We review the trial court’s grant of summary judgment to the Bank and McSpadden against
the standard of Tenn. R. Civ. P. 56.04, which provides, in pertinent part, as follows:

               the judgment sought shall be rendered forthwith if the pleadings,
               depositions, answers to interrogatories, and admissions on file,
               together with the affidavits, if any, show that there is no genuine issue
               as to any material fact and that the moving party is entitled to a
               judgment as a matter of law.

Since our inquiry involves a question of law, there is no presumption of correctness as to the trial
court’s judgment. Robinson v. Omer, 952 S.W.2d 423, 426 (Tenn. 1997). In making our
determination, we must view the evidence in a light most favorable to the nonmoving party, and we
must draw all reasonable inferences in favor of that party. Byrd v. Hall, 847 S.W.2d 208, 210 (Tenn.
1993). Summary judgment is appropriate only if no genuine issues of material fact exist and if the
undisputed material facts entitle the moving party to a judgment as a matter of law. Tenn. R. Civ.
P. 56.04; Byrd, 847 S.W.2d at 211.




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                                                  III.

        We will first address the propriety of summary judgment to the Bank on the promissory
notes. The Bank supported its motion for summary judgment with the affidavits of McSpadden and
Finnell, as well as with Cross’ testimony at the previous bench trial in which she acknowledged that
she knew it was her obligation to keep the property insured in the amount of the loans. In opposition
to the Bank’s motion, Cross cites her testimony from the prior trial to the effect that McSpadden had
promised to contact Cross’ insurance agent and advise him to increase the insurance coverage on the
mortgaged property:

               Q        All right. Now, when you went in the bank on February 28th,
               tell the court just exactly everything you can recall taking place.

               A       When I went to the bank on February the 28th was for a
               closing of the loan where I had borrowed $75,000. I met with Larry
               McSpadden in the construction department. I went in, and sat down,
               and talked with Larry. He asked me to read over some documents.
               He had several documents. And I started reading over the documents,
               and I noticed that they had the wrong insurance company. They had
               Nationwide Insurance, which was the insurance company from my
               first home.

                      That’s when I told Larry McSpadden that they had the wrong
               insurance company on my paperwork, and he said, “You still don’t
               have Nationwide Insurance?” And I told him no. And he asked me
               who my insurance company was, and I told him that it was Insurance
               Incorporated with John Lucchesi. And he goes, “Oh, I know John
               Lucchesi. He’s a good friend of mine.” He said, “Well, let’s just call
               him and I’ll get proof of insurance at that time.”

                       So we called twice and the telephone was busy. He asked me
               if I was on my lunch hour, and I told him yes. He said, “Well, I’ll tell
               you what, if you’ll just initial through this – put your initials and write
               down the insurance company that you have at this time, I will call
               John, get proof of insurance.”

                      He says, “Oh, by the way, have you talked to him about the
               increase?” I told him no. That’s where I was going as soon as I left
               the bank. And he said, “Well, I’ll call John. I’ll take care of the
               proof of insurance, and I’ll also talk to him about the increase of the
               amount.” So I initialed everything, [and] left the bank[.]




                                                  -5-
        We find that the Bank is entitled to summary judgment on the promissory notes. In
opposition to the Bank’s motion, Cross asserts as a defense that the Bank orally agreed to contact
her insurance agent and have the amount of insurance coverage increased to conform to the total
amount of the loan. While this fact is certainly in dispute – McSpadden denies having had any such
conversation with Cross – it is not material to the Bank’s suit on the notes. Cross is obligated to pay
the promissory notes unless and until her obligation is discharged in accordance with the Uniform
Commercial Code. See T.C.A. § 47-3-601 et seq. The Bank’s alleged failure to procure additional
insurance for Cross does not constitute a discharge under the Code. See id.; see also Lancaster
Estate v. Williamson County Bank, 664 S.W.2d 294, 295-96 (Tenn. Ct. App. 1983) (finding
allegation that the lender failed to procure credit life insurance as promised does not discharge or
serve as a defense to debtor’s obligation on note). The Bank’s alleged conduct does not provide
Cross with a defense to the Bank’s claim. Thus, Cross has not demonstrated that there is a genuine
issue of material fact for trial as to the issue of the Bank’s right to recover on the promissory notes.
Accordingly, summary judgment was properly granted to the Bank on the notes.

        While the Bank’s alleged oral agreement does not preclude summary judgment on the Bank’s
claim, it may be the basis for a counterclaim or separate action sounding in contract or tort. See
Lancaster Estate, 664 S.W.2d at 296. Thus, even though the Bank is entitled to summary judgment
on the notes, the defendant’s counterclaim and third-party complaint, which raise issues of
promissory estoppel and other theories of recovery, may still present viable theories of recovery.
Thus, the question becomes whether the Bank and its agent, McSpadden, are entitled to summary
judgment on these claims as well.

        The appellees argue, as they did in the trial court, that they are entitled to summary judgment
on Cross’ counterclaim and third-party complaint because the parol evidence rule bars consideration
of Cross’ allegation of an oral agreement that the Bank would arrange for additional insurance on
the subject property. They argue that the alleged oral agreement stands in contradiction to the terms
of the mortgage documents requiring Cross to purchase and maintain insurance on the property.

        The parol evidence rule provides that testimony of prior or contemporaneous oral agreements
“is inadmissible to contradict, vary, or alter a written contract where the written instrument is valid,
complete, and unambiguous, absent fraud or mistake or any claim or allegation thereof.” Airline
Constr., Inc. v. Barr, 807 S.W.2d 247, 259 (Tenn. Ct. App. 1990). Our courts have held, however,
that parol evidence of an independent collateral agreement is admissible so long as the collateral
agreement does not vary or contradict the writing. Id. The application of the parol evidence rule and
its exceptions depends on the particular facts of each case. Early v. Street, 192 Tenn. 463, 241
S.W.2d 531, 535 (1951).

       While we are not aware of any Tennessee cases addressing a factual scenario similar to the
one now before us, other jurisdictions have held that the parol evidence rule is not applicable where
the mortgagor has a duty to insure the property pursuant to a written agreement but the parties make
a separate agreement that the mortgagee will in fact procure or renew the insurance for the
mortgagor. In Tincher v. Greencastle Fed. Savings Bank, the mortgagor alleged, inter alia, that


                                                  -6-
the mortgagee had breached an oral contract to maintain insurance on the mortgaged property. 580
N.E.2d 268, 269 (Ind. Ct. App. 1991). The trial court found that the parol evidence rule barred
consideration of the oral agreement and granted the mortgagee summary judgment. Id. at 271. The
Indiana Court of Appeals reversed, finding as follows:

               The inference most favorable to [the mortgagor] is that the terms of
               the oral agreement required Bank to act as [the mortgagor’s] agent in
               the maintenance of insurance. Such an agreement does not contradict
               his duty under the mortgage agreement to procure and maintain
               insurance. It is a separate contract made in order to facilitate the
               exercise of that duty. There is an issue of material fact regarding
               whether there was consideration to support the oral agreement.

Id. at 272. In Graddon v. Knight, the mortgagors sued the mortgagee under the theories of estoppel
and negligence, alleging that the mortgagee had orally agreed to procure the necessary insurance for
them. 292 P.2d 632, 634-35 (Cal. Dist. Ct. App. 1956). The California District Court of Appeals
rejected the bank’s argument that the parol evidence rule bars the admission of oral testimony to
support the mortgagors’ theories:

               [T]he admissibility of parol evidence here was not to vary the terms
               of the deed of trust, but to show a contemporaneous oral agreement
               to the effect that while [the mortgagors] obligated themselves under
               the written agreement to procure and maintain fire insurance, the
               parties agreed that the physical act of obtaining the insurance which
               [the mortgagors] were obligated to furnish was to be done by the
               bank. In other words the bank agreed to act as [the mortgagors’]
               agent to obtain the insurance. There is nothing in such agreement that
               in any way varies the terms of, or is contradictory to, the written
               instrument.

Id. at 635. In Painter v. Twinsburg Banking Co., the mortgagor sued the mortgagee, alleging a
breach of an oral contract to have the mortgaged buildings insured against fire loss. 87 N.E.2d 502,
502 (Ohio Ct. App. 1949). The Ohio Court of Appeals reversed a directed verdict for the mortgagee,
finding that the parol evidence rule did not preclude the admission of evidence of the parties’ oral
agreement:

               Under the written provisions of the mortgage, it was the duty of the
               mortgagor to insure the mortgaged property, not only for her own
               benefit, but likewise for the benefit of the mortgagee, who, in the
               event of a fire, would be entitled to a share of the payment to apply on
               the principal of the note and mortgage. There was, however, no
               obligation of the mortgagor to personally secure the insurance. She
               could contract with another to care for this business detail. And, if


                                                 -7-
                 the contract was based upon a consideration, she could hold the agent
                 responsible for damages resulting from his negligence or breach of
                 contract. Such verbal agreement, in which the mortgagor employs the
                 mortgagee as her agent, is not contradictory to or in derogation of the
                 written agreement in the mortgage.

Id. at 503-04.

        We find these cases to be persuasive. The mortgage documents in the instant case required
Cross to purchase and maintain insurance on the property. There is nothing in the oral agreement,
pursuant to which McSpadden allegedly agreed to contact the insurance agent and have the amount
of insurance increased, that contradicts the terms of these written agreements. Neither the security
agreement, the deed of trust, nor the borrower’s agreement requires Cross to personally procure and
maintain the insurance; there is nothing in these documents prohibiting Cross from employing or
otherwise permitting another person to tend to this detail for her. We find and hold that the parol
evidence rule does not bar consideration of the alleged oral agreement. Accordingly, the trial court’s
grant of summary judgment to the Bank and McSpadden as to the counterclaim and third-party
complaint was inappropriate.

                                                  IV.

        The appellees argue that summary judgment was properly granted to them because, so the
argument goes, Cross failed to comply with various provisions of Tenn. R. Civ. P. 56. First, they
contend that Cross did not comply with Tenn. R. Civ. P. 56.03, which requires a non-moving party
to respond to each fact set forth by the moving party by either (1) agreeing that the fact is undisputed;
(2) agreeing that the fact is undisputed for the purposes of the motion only; or (3) demonstrating,
with specific citations to the record, that the fact is disputed. Second, they argue that Cross did not
comply with Tenn. R. Civ. P. 56.04, which provides that the non-moving party may serve and file
opposing affidavits no later than five days before the summary judgment hearing.

       We find that Cross’ response is substantially in compliance with the requirements of Rule
56.03. Cross’ response adequately sets forth the facts that are undisputed. Furthermore, it
adequately sets forth, with appropriate citations, those facts that she alleges are in dispute. As to the
appellees’ second argument, we find that the “five-day rule” for affidavits set forth in Rule 56.04 is
not applicable for the simple reason that Cross did not rely upon affidavits in opposing the motions
for summary judgment; on the contrary, she pointed to testimony at the first trial. The appellees’
arguments are without merit.

                                                   V.

        Cross argues that the trial court erred in confirming the Master’s report and entering a
judgment against her in the amount of $11,349.06. As previously indicated, the undisputed material
facts before the trial court conclusively demonstrate that the Bank is entitled to summary judgment


                                                  -8-
on its notes. By the same token, those same facts show that the Bank is entitled to recover the
amount found by the Master and confirmed by the trial court. Accordingly, this issue is found
adverse to Cross.

                                              VI.

       The trial court’s grant of summary judgment to the Bank on its original claim is affirmed.
The grant of summary judgment to the Bank and McSpadden on Cross’ counterclaim and third-party
complaint is hereby vacated. This case is remanded for further proceedings, consistent with this
opinion. Exercising our discretion, costs on appeal are taxed to the parties equally.



                                                    ___________________________________
                                                    CHARLES D. SUSANO, JR., JUDGE




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