August 1, 2014
by Gerald Morgan
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)
The Court of Appeals of Tennessee has ruled that Tennessee does not recognize a claim for “wrongful acceleration of a note in default.”
In Snyder v. First Tennessee Bank, N.A., No. E2013-01524-COA-R3 (June 24, 2014), Janet Snyder was a beneficiary of a trust (Trust) from her deceased father. She was entitled to certain income from the Trust. First Tennessee Bank (Bank) was appointed the trustee of the Trust. Snyder signed a note and deed of trust with the Bank secured by her home. When she got into financial trouble, she asked the Bank to help with her payments by using funds from the Trust. The Bank declined. She then asked that the Trust be terminated and the proceeds paid out to the beneficiaries, which included her. The Bank announced that it would resign as trustee, but did not join the beneficiaries in dissolving the Trust.
Later, Snyder asked the Bank for a hardship advance pending the Trust’s dissolution so that she could make her mortgage payments. The Bank declined to do that. Snyder hired counsel to seek dissolution of the Trust. The Bank filed a petition seeking the appointment of a successor trustee, and Snyder filed a counterclaim. Then the Bank threatened foreclosure and served a notice of acceleration on Snyder. Thereafter, the Trust was dissolved by agreed order. The Bank, which up to that point had been trustee, wrote itself a check from the Trust to cover the default.
Snyder filed an action seeking compensatory and punitive damages for breach of contract. She alleged that the Bank acted in bad faith and forced her to incur needless attorneys’ fees in dissolving the Trust. The Bank filed a motion to dismiss for failure to state a claim, and Snyder filed a reply, clarifying that her complaint was based on breach of the deed of trust. The trial court granted the Bank’s motion to dismiss, holding that no foreclosure occurred and any wrongful foreclosure claim therefore failed, and there was no breach of contract claim (because it was time barred and the Bank did not breach the contract).
The sole issue for the court of appeals was the dismissal of the claim for breach of contract. Snyder relied on the acceleration clause, which was a standard clause found in most deeds of trust. She asserted that the Bank “abused its discretion” in accelerating the debt. Primarily, the plaintiff alleged that the Bank was well aware of the fact that the Trust had sufficient funds to cover the default, and thus accelerating the debt was an “unconscionable enforcement” of the acceleration clause in the deed of trust. A further allegation was that such an unconscionable enforcement was a “clear abuse of discretion;” she was asking the court to recognize a claim of wrongful acceleration of a note in default.
The court of appeals declined to recognize such a claim. It stated that in the absence of mistake or fraud, the courts will not create or rewrite a contract simply because its terms are harsh or because one of the parties was unwise in agreeing to them. Snyder had clearly defaulted, a fact that was undisputed. The court stated: “The Bank was under no obligation, contractual or otherwise, to forbear on its right to accelerate. In accelerating Snyder’s debt, the Bank did no more than what it was allowed to do under the contract. Whether the Bank knew it held other of Snyder’s funds in the Trust that could cover the debt eventually is irrelevant to the terms of the contract. Performance of a contract according to its terms cannot be characterized as bad faith.”
This case provides strong indications that Tennessee courts will not hesitate to dismiss claims where the lender simply acts upon a contract according to its terms.
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