In a declaratory judgment action involving Bankers Trust Company (plaintiff) and Commercial Credit Plan, Inc. (defendant), the Tennessee Court of Appeals upheld the Trial Court's ruling that recorded trust deeds and notes take precedence over unrecorded ones, thereby dismissing the plaintiff's action. The case arose after Timothy L. Collins and April Collins defaulted on loans secured by unrecorded trust deeds held by the plaintiff, while the defendant secured loans with recorded trust deeds. Following the default, the defendant foreclosed on the property, which was subsequently sold to a third party.
The plaintiff, as the successor-in-interest to Advanta National Bank, did not have recorded assignments for their loans, while the defendant's loans were recorded with the Knox County Register of Deeds. The court noted that both parties had stipulated documents forming the evidentiary basis for the case. Timothy Collins did not defend against the claims, resulting in a judgment against him for $120,986.05.
Collins had initially taken a loan from Advanta, secured by unrecorded trust deeds, which were meant to pay off an existing mortgage. The defendant later provided a loan and recorded the associated trust deeds after agreeing to pay off the Advanta loans; however, a check issued for this payment was returned due to confusion over the proper application of funds. Advanta eventually declared a default, leading to legal intervention by Collins’ attorney, who indicated a willingness to resolve the matter. A title examination conducted later confirmed that Advanta's trust deeds remained unrecorded.
The report outlines the original Sterling mortgage and notes two deeds of trust filed by the defendant on April 21, 1999, without an assignment from Advanta to the plaintiff. The defendant foreclosed on its interest, leading to the sale of the Collins property to a bona fide purchaser on July 26, 2000. The foreclosure proceedings were deemed regular and valid. In September 2000, the plaintiff sought a Declaratory Judgment but the Chancellor ruled in favor of the defendant, stating that the plaintiff's failure to record its deeds eliminated any claim of constructive notice. Additionally, the court determined that the defendant was not unjustly enriched and dismissed the defendant from the case.
Legal findings involving only questions of law are reviewed de novo, with no presumption of correctness on appeal, as established in Guffey v. Creutzinger and ATS, Inc. v. Kent. According to Tenn. Code Ann. 66-26-103, unregistered instruments are void concerning creditors and bona fide purchasers without notice. Evidence does not indicate that the defendant received notice of Advanta's mortgage, and the only relevant document was an 'Itemization of Account Financed' that did not provide such notice. With the property sold to a bona fide purchaser for value, the plaintiff is not entitled to equitable relief.
Subrogation, which allows one to step into the shoes of a creditor, is based on equitable principles. For subrogation to apply, the claimant must have a strong equity and a clear case, as the doctrine will not be enforced where equities are equal or where it would prejudice others' rights. In this instance, the equities favor the defendant, or at least are equal, which negates any claim for equitable subrogation.
The Advanta loan was taken out specifically to refinance the Sterling mortgage, and Advanta is not entitled to subrogation of Sterling's rights as there was no fraud or mistake involved in the transaction. Equitable relief is only available when one party mistakenly pays another's debt, and not if the party seeking relief has acted with culpable negligence, as established in Dixon v. Morgan. The plaintiff did not record its documents for over a year and was aware of another creditor's claim on the same collateral by April or May 1999. The defendant attempted to pay Advanta but the check was returned due to incorrect payoff figures. Despite assurances from Collins' counsel that the debt would be settled upon receipt of accurate information, Advanta only responded that the figures were incorrect. The plaintiff had options for handling the insufficient check, such as retaining it with a notice of insufficiency or placing the funds in escrow. Courts generally do not intervene when a party fails to protect its own interests. The plaintiff claimed the defendant was negligent for not reissuing a correct check, yet there is no evidence that the defendant received accurate figures from Advanta. The principle of equitable subrogation aims to prevent unjust enrichment, but the Trial Court concluded that Commercial Credit was not unjustly enriched in this case. The appellate court affirmed the Trial Court's judgment and remanded the case, with costs of the appeal assigned to Bankers Trust Company.
