In Re Maryville Savings & Loan Corporation, Debtor.peoples Bank of Polk County, Plaintiff-appellee, v. John E. Mcdonald, Trustee, Defendant-appellant, 760 F.2d 119 (6th Cir. 1985)

Following entry of a decision in this case on September 12, 1984, see 743 F.2d 413, affirming in part and reversing in part 31 B.R. 597 (D.C.Tenn.), remanding 27 B.R. 701 (Bkrtcy.Tenn.), appellant, bankruptcy trustee for Maryville Savings and Loan Corporation, the debtor, filed a motion for reconsideration and clarification of the opinion, in particular reference to the proper handling of funds paid to the trustee on the promissory notes at issue "from non-foreclosure sources." In response, appellee, Peoples Bank of Polk County, concurred in the motion to the extent that clarification was requested to settle whether the funds collected by the trustee should be paid to Peoples Bank or whether the funds (held in a separate account pending resolution) should be held for the benefit of all creditors, including Peoples Bank, because Peoples Bank had not perfected its security interest in the notes under the Uniform Commercial Code ("U.C.C.") applicable in Tennessee. The parties were directed to file and did submit supplemental briefs on this interesting question remaining in this longstanding controversy.

On the one hand, the trustee argues that language in W.C. Early Co. v. Williams, 135 Tenn. 249, 254, 186 S.W. 102, 107 (1916), is controlling:

It is a well-settled rule with us that the lien of a mortgage or trust deed passes, without a special assignment thereof, to the indorsee of a note or transferee of the debt secured by the instrument. The policy of the law is to treat the note as the principal thing and the mortgage as incident--the transfer of the note secured as a transfer pro tanto of the incident, the lien of the mortgage.

The trustee asserts, therefore, that the deed of trust lien passed to the transferee of the debt, that the note "is the principal thing" and that "the lien of a mortgage [deed of trust]" remains with the possessor of the notes, in this case the debtor, and henceforth the trustee. See also 55 Am.Jur.2d Mortgages Sec. 1270 (1970); Sobel v. Mutual Development, Inc., 313 So. 2d 77 (Fla.Dist.Ct.App.1975).

Peoples Bank, however, relies upon the recent decision of the Tennessee Supreme Court in Hudson v. Town & Country True Value Hardware, Inc., 666 S.W.2d 51 (Tenn.1984), arguing that the predominant nature of the transaction was real estate related, and that a "predominant factor test" need be applied, as in DeFilippo v. Ford Motor Co., 516 F.2d 1313 (3rd Cir.), cert. denied, 423 U.S. 912, 96 S. Ct. 216, 46 L. Ed. 2d 141 (1975), cited in Hudson. It argues further that the transfer and subsequent recordation of the deeds of trust effectuated a transfer of title, rather than a mere lien, see Howell v. Tomlinson, 33 Tenn.App. 1, 228 S.W.2d 112 (1949),¹  and evidences "in the absence of contrary proof, ... an intent to transfer the debt as well."

We cannot say that the "predominant factor" in this case is real-estate-related as urged by Peoples Bank, because of the existence of the deed of trust; the transaction was similarly concerned with promissory notes, which are usually treated as personalty under the U.C.C. DeFilippo was concerned with the bulk sale of a business, and whether the items involved in the sale were predominantly goods or moveables within the meaning of Pennsylvania law. Real estate was apparently not involved. The court held in that case that the U.C.C. applied to the transaction under the "rule of reasonable characterization of the transaction as a whole." 516 F.2d at 1323. Hudson similarly involved the bulk sale of a going business, involving both real estate and stock in trade. The Tennessee Chief Justice in Hudson held that since the "predominant assets" to be transferred were "non-goods," or real estate, the U.C.C. did not apply to the transaction. 666 S.W.2d at 54. We find none of the cases cited by Peoples Bank to be determinative of the question before us. There is no bulk sales issue here involved.

W.C. Early decided that the holder and possessor of notes, secured by a deed of trust purportedly but wrongfully reflected as having been satisfied and released, would prevail over a bona fide purchaser of the property subject to the indebtedness reflected by the notes. We conclude that it was up to the creditor, Peoples Bank, to protect itself with respect to its interest in the notes, and that its failure in this respect brings about the conclusion that the trustee must prevail with respect to the proceeds of the notes received without respect to foreclosures. To the extent foreclosure of the deeds of trusts, with respect to which Peoples Bank has perfected its interests, brings about a realization of funds, the result might be to the contrary.

We accordingly hold that the appellant trustee is entitled to the proceeds in controversy. Each party will bear its own costs of this appeal.