Washington Mutual Bank, F.A. v. ORNL Federal Credit Union, et al.

In this appeal, we determine the priority between two recorded deeds of trust. Homeowners entered into a line of credit with a credit union secured by a recorded deed of trust on the homeowners’ home. The homeowners subsequently refinanced their home with a bank. The bank paid off the homeowners’ debt to the credit union, and recorded its own deed of trust securing its loan. At that same time, the loan and deed of trust was assigned to a second bank. Despite the payoff of the homeowners’ debt by the assignor bank, the first deed of trust to the credit union was never released, and the homeowners continued to draw on the line of credit. When the homeowners began having financial problems, the assignee bank discovered that the credit union had never released its deed of trust on the homeowners’ property because of a provision in the deed of trust stating that its release was conditioned upon the borrower requesting the cancellation of the line of credit. When the homeowners defaulted on both loans, the question arose as to which party’s deed of trust had priority. The trial court ruled in favor of the assignee bank on the basis that the credit union was equitably estopped from asserting its deed of trust because, at the time of payoff, the credit union did not follow its self-imposed practice of advising if any action other than payoff was required before release of the deed of trust. After careful review, we reverse because we conclude that the assignor bank had the means of discovering that payoff alone was insufficient to trigger the release of the deed of trust and because, under state statutory law, it had prior notice of all prerequisites to release the deed of trust as a result of the credit union’s registration of such deed.