The opinion
FIRST AMERICAN NATIONAL BANK, )
)
Plaintiff/Appellee, )
) Appeal No.
) 01-A-01-9503-CH-00109
V. )
)
J.M.D. BRANSFORD, ) Davidson Chancery
) No. 91-2790-III
Defendant/Appellant. )
FILED
Sept. 13, 1995
COURT OF APPEALS OF TENNESSEE
Cecil Crowson, Jr.
MIDDLE SECTION AT NASHVILLE Appellate Court Clerk
APPEAL FROM THE CHANCERY COURT FOR DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE
THE HONORABLE ROBERT S. BRANDT, CHANCELLOR
B. ANTHONY SAUNDERS
721 First American Center
Nashville, TN 37237-0721
GEORGE H. CATE, III
Neal & Harwell
2000 First Union Tower
150 Fourth Avenue North
Nashville, TN 37219
ATTORNEYS FOR PLAINTIFF/APPELLEE
ROBERT L. DeLANEY
323 Union Street
Nashville, TN 37201
ATTORNEYS FOR DEFENDANT/APPELLANT
REVERSED AND REMANDED
SAMUEL L. LEWIS, JUDGE
O P I N I O N
This is an appeal by defendant, J.M.D. Bransford, from the
trial court's granting of the motion for summary judgment of
plaintiff, First American National Bank (Bank), and resulting
judgment in the bank's favor on a promissory note made by defendant
Bransford as a co-maker.
This case commenced when the bank, as lender, brought suit
against defendant Bransford as a co-maker of a note. The sole
issue on appeal is whether the trial court erred in granting
summary judgment as to each of the defendant's defenses and
entering judgment against defendant Bransford as co-maker on a
note.
Mr. Bransford was co-maker with Mr. James W. Stewart on a
note for two hundred thousand dollars. Mr. Stewart was the owner
and president of TennLite, Inc. and other related businesses.
TennLite manufactured permanent briquettes for gas grills and
refracting bricks used to line wood-burning stoves. Mr. Stewart's
financial condition had continually deteriorated over the course of
a long relationship with the bank. Mr. Bransford's defense to the
bank's action to collect on the note is that, fully aware of Mr.
Stewart's precarious financial situation at the time the loan was
made, the bank misrepresented the degree of the risk it entailed to
Mr. Bransford.
The loan in question was only the latest of many dealings
Mr. Stewart had had with the bank in financing his business
ventures. Mr. Stewart began doing business with the bank in 1965.
He was regarded by some of the officers of the bank, during the
period 1988-89, as being an effective, well-known business person
and a "friend of FANB," and as a philanthropist because of his
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donations to Vanderbilt University.
In 1987, Mr. Stewart approached the officers at the bank
about paying off one of his several existing lines of credit. One
of his businesses, TennLite, Inc., had a line of credit of
approximately $235,000.00, and Mr. Stewart wanted to increase the
line to one million dollars.
Mr. Stewart was starting up a new business, SoniClean, Inc.,
which was to use a sonic wave process to extract usable material
from coal slurry. He needed additional cash to fund the various
startup costs associated with Soniclean, Inc.
Becaue Soniclean, Inc. had no credit history and very few
assets, it was not the type of business to which the bank was free
to extend substantial credit. Mr. Stewart proposed therefore that
the line of credit of TennLite, Inc. be extended and the proceeds
be used in large part to fund startup costs of Soniclean, Inc.
The bank agreed to this proposal with one minor
modification, made in order to "add the needed protection to First
American and at the same time preserve the Subchapter 'S' status of
Soniclean," according to Wallace Carter, III, the bank official who
eventually handled Mr. Stewart's loans. It was agreed TennLite,
Inc. was to draw down the line of credit to make loans to Mr.
Stewart, the principal shareholder. Mr. Stewart invested most of
the one million dollar loan in Soniclean, Inc.
Soniclean, Inc. never became even a marginally successful
business. As of 31 December 1988, SoniClean had little funding
outide of shareholder investment. In 1989, SoniClean was able to
meet some coal contracts, but its ability to generate income from
coal sales remained inconsistent, despite Mr. Stewart's sanguine
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assurances to the bank.
Economic distress created by SoniClean, Inc.'s unprofitable
circumstances compounded other economic problems Mr. Stewart and
his related business entities were having during this period.
TennLite, Inc. was losing money. By 1987, sale of the brickets
accounted for almost all of TennLite's revenue. The sale of all
other products of TennLite were in decline as they had been in both
percentage and dollar terms since 1985. By 1988, the cost of
manufacturing the briquettes increased while sales diminished.
TennLite's income statement during the year ending 30 June 1989
showed a net operating loss of $183,000.00 and a cash loss of
$135,000.00.
The income TennLite, Inc. earned during the year ending 30
June 1989 was generated primarily from the sale of real estate it
owned and not from the sale of TennLite products. Its economic
difficulties were further exacerbated by the necessity of servicing
the huge debt it incurred for SoniClean. By March 1989, TennLite
had four lines of credit with the bank, the "A term" in the amount
of one million dollars, the "B term" in the amount of four hundred
thousand dollars, the "C line" in the amount of two hundred
thousand dollars, and the "D open-end market" in the amount of
twenty-five thousand dollars. Each of these lines of credit were
fully funded by the bank.
In March 1989, the bank increased the "C line" from two
hundred to four hundred thousand dollars. The bank was willing to
extend the "C line" primarily because of a personal guarantee given
by Wright Brothers Construction Company covering the entire two
hundred thousand dollar "C line" increase.
Soniclean, Inc. also had a letter of credit in the amount
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of $62,675.00 through the bank during this same period. This
letter of credit was originally approved for New Acton Coal Mining
Company, Inc. but was transferred to SoniClean Coal of Alabama,
Inc., a subsidiary of SoniClean, Inc., in November 1987.
Mr. Stewart had other business activities funded through
loans from the bank which were also troubled. Specifically, Mr.
Stewart and TennLite, Inc. owned, through a joint venture known as
Stewart & Warren Bohnsack/Russell, Worley & Company, oil and gas
rights in the Indian Creek Venture located in Morgan County,
Tennessee. Because the other partners in this venture suffered
great losses in the 1987 stock market crash, Mr. Stewart had in
1987 assumed payment, by himself, of interest on the approximately
nine hundred thousand dollars in debt to the bank associated with
this investment.
Mr. Stewart also had personal debt to the plaintiff bank in
the amount of at least $300,000.00 as well as a home loan during
this same period. He had personally guaranteed each of these
debts.
Mr. Stewart had substantial debt to other banks in Nashville
personally and in connection with his various businesses during the
period 1988-89. He also owed Third National Bank $2,500,000.00 and
had a large line of credit at First Tennessee Bank. Plaintiff bank
was aware of these loans.
In 1987 Mr. Stewart, personally and in connection with
business ventures, had debt financed through Commerce Union
Bank/Nations Bank in the total amount of $300,000.00. Mr. Stewart
never paid this debt.1 By 1987 or early 1988, Mr. Stewart and his
1
This debt was ultimately satisfied by the obligation being
sold to third parties at full value.
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related businesses were in serious economic distress, and the
record shows that the plaintiff bank knew or should have known of
these facts.
In 1988, the bank changed the officer responsible for
managing its relationship with Mr. Stewart and his related
businesses. The bank gave Wallace Carter, III the direct
responsibility for managing Mr. Stewart's and his related
businesses' relationships with the bank.2 Mr. Carter had moved
into the service industries division of the bank, where Mr.
Stewart's loans were handled, in September or October of 1987. Mr.
Carter commenced closer review of these relationships.
At some point in 1988, the bank reclassified the Stewart and
related business loans, changing their credit status from "2" to
"4." Under the bank's policies in effect at that time, such a
reclassification indicated that, in the bank's assessment, the
creditworthiness of Mr. Stewart's loans had diminished.
Credit status 4 was not a "non-performing loan" but was at
least one or two levels above non-performing. However, starting in
1988 Mr. Stewart and his related businesses were paying interest
only on their obligation to the bank.
In March 1989, the bank moved at least one of TennLite's
credit lines to the loan servicing division so it could have closer
monitoring. This loan was to be managed as a "Level IV" loan, as
all of Mr. Stewart's other business and personal loans ultimately
were managed. In March 1989, the bank informed Mr. Stewart that it
would no longer provide new funding for SoniClean unless outside
equity, rather than the assets of TennLite, Inc., was provided as
2
Mr. Carter had more experience than Julie Brown, the
officer who had been managing Mr. Stewart's loans.
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collateral. It was for this reason that the four hundred thousand
dollar "C line" which the bank provided TennLite in March 1989 was
guaranteed to the extent of two hundred thousand dollars by Wright
Brothers Construction Company.
During the 1988-89 period, Mr. Stewart and his related
businesses were proposing to Mr. Carter and other officers of the
bank the sale of various assets, primarily real estate, to cure Mr.
Stewart's financial problems. The proposed sales never occurred
with one exception. Because of costs associated with grading the
property, this lone sale netted substantially less than expected.
Mr. Carter reviewed the financial affairs of Mr. Stewart
during part of 1988 through April 1990. He monitored the progress
of the sale of assets. He reviewed the books and records of Mr.
Stewart and his businesses. He interviewed various individuals
doing business with Mr. Stewart and had parcels of real estate and
other assets belonging to Mr. Stewart appraised. Mr. Carter's
monitoring included regular visits to Mr. Stewart's offices to
review business records and other matters provided by Mr. Stewart
and his businesses. Mr. Stewart continued to provide Mr. Carter
with optimistic accounts of his business financial circumstances;
however, the financial information belied those representations.
By 30 June 1988, internal records generated by the bank
indicated that TennLite, Inc.'s financial status was equivalent to
bankruptcy. However, the bank continued to extend Mr. Stewart and
his related businesses credit.
The bank apparently relied on Mr. Stewart's record and
reputation and the strength of his personal financial statement,
which showed that he had assets of nine million dollars and
liabilities of four and a half million during the period 1988-89.
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However, liquidation of Mr. Stewart's personal and business assets,
pledged as collateral for his debt, has only netted a small
fraction of his alleged personal and business net worth.
In late November 1989, Mr. Stewart approached defendant
J.M.D. Bransford about co-signing a note for SoniClean, Inc. Mr.
Bransford, Mr. Stewart, and others had an office-sharing
arrangement in a Nashville office. Mr. Bransford's primary
business interest during the period of May-June 1988 through 1990
was a business called August, Inc., a mining operation using
chemicals to extract precious metals from spent copper mine
tailings.
Officers, directors, and investors in August, Inc., but not
Mr. Bransford, hired Mr. Stewart to run August, Inc. for a
$10,000.00 monthly fee and a percentage of stock in August, Inc.
Mr. Bransford became involved with Mr. Stewart in August, Inc. only
after others brought Mr. Stewart into the company.
Despite the physical proximity, Mr. Bransford had no
knowledge of any of Mr. Stewart's other businesses, including
TennLite, Inc. and SoniClean, Inc. Mr. Bransford testified, "at
the time I was not privy to any of the information regarding what
James' various interests were. I was not particularly interested
in what those businesses were."
When Mr. Stewart approached Mr. Bransford to "sign a note,"
i.e. a two hundred thousand dollar note as co-maker, Mr. Bransford
said, "Jim, I know nothing about the coal business," to which Mr.
Stewart responded, "this note will be paid back and the royalties
of the production of coal will pay it." Mr. Bransford signed the
note as co-maker about one week later.
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Mr. Bransford did not make a due diligence investigation of
the status of SoniClean, Inc. before he agreed to co-make the note,
but he did talk to Mr. Carter at the bank. Mr. Bransford had come
to know Mr. Carter through Mr. Stewart. Mr. Carter had breakfast
with Mr. Bransford "to discuss the possibility of his [Mr.
Bransford's] moving his trust accounts to the bank."
Mr. Bransford testified by deposition as follows:
Well, I'll tell you why I didn't do it before.
There were two reasons; I wanted to help Jim
Stewart, one. I knew that Buz [Wallace} Carter was
out there two or three times a week in the late
afternoon in James' office for significant periods
of time. I knew he was staying very close to what
was going on and when I relied upon Buz Carter,
when I asked the question of Buz, Buz is there
anything more risky about signing this note or this
investment than a normal business investment,
knowing full well that he was involved up to his
neck on a weekly daily basis, he replied no.
According to Mr. Carter, Mr. Stewart "handled most of the
loan transaction." Mr. Carter further testified, "I think he [Mr.
Stewart] was the one who requested it. He was the one who told us
that Mr. Bransford was willing to make the transaction, and I don't
remember specifically telling Mr. Bransford what the proceeds would
be."
Mr. Bransford did not receive any proceeds from the two
hundred thousand dollar loan. While there was some discussion of
Mr. Bransford's receiving stock in SoniClean, Inc. for co-making
the note, this never materialized.
One hundred fifty thousand dollars of the proceeds of the
note was distributed the day following the loan as follows:
$30,000.00 to SoniClean of Alabama, $20,000.00 to James W. Stewart,
and $100,000.00 to TennLite, Inc. Mr. Carter was aware that the
proceeds of the two hundred thousand dollar loan would be disbursed
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to pay the SoniClean debt.
Defendant insists that the trial court erred in granting
summary judgment since there were genuine issues of material fact
existing between the parties.
In Bellamy v. Federal Express Corp., 749 S.W.2d 31 (Tenn.
1988), our Supreme Court stated:
[I]t has been repeatedly stated by this Court that
the purpose of a summary judgment proceeding is not
the finding of facts, the resolution of disputed
factual issues, or the determination of con-
flicting inferences reasonably to be drawn from
facts. The purpose is to resolve controlling
issues of law, and that alone.
Id. at 33.
In determining whether or not a genuine issue of fact exists
in a summary judgment case, we must look at all the evidence, take
the strongest legitimate view of it in favor of the party opposing
the motion, allow all reasonable inferences from it in its favor
and discard all countervailing evidence. If there is then any
dispute as to any material determinative evidence or any doubt as
to the conclusion to be drawn from the whole evidence, we must deny
the motion. Berry v. Whitworth, 576 S.W.2d 351, 352-53 (Tenn.
1978); see also Tenn. R. Civ. P. 56.03.
No presumption of correctness attaches to decisions granting
summary judgment, because they involve only questions of law.
Thus, on appeal, we must make a fresh determination concerning
whether or not the requirements of Tennessee Rule of Civil
Procedure 56 have been met. Hill v. City of Chattanooga, 533
S.W.2d 311, 312 (Tenn. App. 1975). In doing so, we must consider
the pleadings and the evidentiary materials in the light most
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favorable to the movants opponent and must draw all reasonable
inferences in the opponent's favor. Blocker v. Regional Medical
Center at Memphis, 722 S.W.2d 660 (Tenn. 1987).
We therefore review this record to determine whether a
genuine issue of material fact exists regarding a valid affirmative
defense asserted by the defendant as to his liability for sums due
under the note which he co-made. Rule 56 contains two requirements
that must be met before granting summary judgment. First, there
must be no genuine issue with regard to material facts relevant to
the claim or defense embodied in the motion. Byrd v. Hall, 847
S.W.2d 208, 211 (Tenn. 1993). Second, the moving party must be
entitled to a judgment as a matter of law based on the undisputed
facts. Anderson v. Standard Register Co., 857 S.W.2d 555, 559
(Tenn. 1993).
In this instance, the burden is upon the bank to persuade
the court that no genuine and material factual issue exists. Byrd,
847 S.W.2d at 211. The court must view the evidence before it in
favor of the non-moving party, in this instance, Mr. Bransford, and
allow all reasonable inferences in his favor and discard all
countervailing evidence. Id. at 210.
In determining whether a genuine issue of material fact
exists, the court is not allowed to weigh the evidence. If it
appears from the record that issues of witness credibility and
testimonial conflicts concerning material factual matters exist
which affect the determination of defenses asserted by the
defendant, then the trial court must be reversed. Id. at 211.
Issues of credibility must be resolved by the trier of fact and
cannot be determined by summary judgment. Id. at 212.
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Defendant insists that a genuine issue exists in the instant
case regarding an affirmative defense that the bank concealed or
failed to disclose the financial circumstances of SoniClean prior
to defendant's execution of the two hundred thousand dollar note as
co-maker.
Defendant, by deposition, testified about asking Mr. Wallace
Carter, the bank's representative, concerning the advisability of
signing the SoniClean note as a co-maker.
The record shows, and Mr. Carter admits, that he was aware
of SoniClean, Inc.'s financial circumstances and those of Mr.
Stewart and TennLite, Inc., all of which were closely related. Mr.
Carter denies, however, that he characterized the two hundred
thousand dollar loan "as being of average risk to the bank, because
that was never my view of the loan ...."
This fact is disputed. The question remains whether this
disputed fact is material and directly related to Mr. Bransford's
affirmative defense, both as a practical and legal matter.
Defendant Bransford takes the position that he would not have co-
signed the note had he known the true facts of SoniClean, Inc.'s
financial circumstances.
The record is clear that defendant Bransford received
nothing of value for co-making the note, no stock in the company or
proceeds of the loan.
Mr. Bransford testified that he relied upon the
representation of Mr. Carter, the bank's representative, and was
induced to act as a co-maker on the two hundred thousand dollar
note relying upon only those representations.
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The evidence is that Mr. Bransford had not made a decision
to become a co-maker on the note until he had his conversation with
Mr. Carter, and that he only signed the note following the
conversation with Mr. Carter.
A fair inference can be drawn from the record that Mr.
Bransford did not trust Mr. Stewart to report the financial
circumstances of SoniClean, Inc. accurately, and that he was aware
that Mr. Carter had closely reviewed the financial circumstances of
Soniclean, Inc. for the bank.
We therefore think that under this record it was reasonable
for defendant Bransford to expect an honest and candid response
from Mr. Carter when he posed the question of Soniclean, Inc.'s
financial circumstances. The bank had a duty to tell the truth and
not to mislead or not to answer at all.
The bank disputes most of the facts; however, for the
purpose of reviewing the trial court's decision in granting summary
judgment, this court must take the strongest legitimate view of
defendant Bransford's evidence, allow all reasonable inferences in
his favor, and discard all countervailing evidence. Byrd, 847
S.W.2d at 211.
In Macon County Livestock Market, Inc. v. Kentucky State
Bank, Inc., 724 S.W.2d 343 (Tenn. App. 1986), this court stated:
[The bank] has no special duty to counsel the
customer and inform him of every material fact
relating to the transaction - including the bank's
motive, if material, for participating in the
transaction - unless special circumstances exist,
such as where the bank knows or has reason to know
that the customer is placing his trust and
confidence in the bank and is relying upon the bank
so to counsel and inform him.
Id. at 350 (emphasis added).
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The court further held that concealment or failure to
disclose becomes fraudulent when "it is the duty of a party having
knowledge of the facts to disclose them to the other party." There
are three such circumstances under which a lender has such a duty.
1. Where there is a previous definite fiduciary
relation between the parties.
2. Where it appears one or each of the parties to
the contract expressly reposes a trust and
confidence in the other.
3. Where the contract or transaction is
intrinsically fiduciary and calls for perfect go
od
faith. The contract of insurance is an example
of this last class.
Macon County Livestock Market, 724 S.W.2d at 349.
Here, the bank and defendant Bransford were parties to the
loan agreement. Based on the testimony of Mr. Bransford, it is
clear that he reposed his trust and confidence in the bank.
Defendant Bransford further contends that the transaction
involving him and the bank was "intrinsically fiduciary," calling
for "perfect good faith." He insists that the bank knew that it
was woefully under-collateralized and that Soniclean, Inc. was or
probably was insolvent. The bank, therefore, was looking for
additional collateral and had an obligation to be perfectly candid
with Mr. Bransford in statements it made inducing him to provide
the additional collateral.
We are of the opinion the bank had a duty to disclose and
that it therefore follows that disputed facts about whether Mr.
Bransford asked and was not told or was erroneously told by the
bank are matters which materially and directly relate to this
affirmative defense. The existence of a dispute about such factual
matters or doubt as to the conclusion to be drawn from these facts
leads us to conclude that summary judgment was erroneously granted
by the trial court. See Byrd, 847 S.W.2d at 211.
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Title 47 of the Tennessee Code deals with Commercial
Instruments and Transactions. Section 47-1-203 provides:
Every contract or duty within chapters 1 through 9
of this title imposes an obligation of good faith
in its performance or enforcement. Tenn. Code Ann.
§ 47-1-203 (1994).
"Good faith" means honesty and fact in the conduct or
transaction concerned. Tenn. Code Ann. § 47-1-201 (1994).
In Lane v. John Deer Co., 767 S.W.2d 138 (Tenn. 1989), our Supreme
Court stated that:
Good faith imposes an honest intention to abstain
from taking any unconscientious advantage of
another, even through the forms and technicalities
of the law.
Id. at 140.
We are of the opinion that the record before this court
shows that the bank's failure to disclose the true financial
circumstances of SoniClean, Inc. to the defendant Bransford is the
proximate cause of Mr. Bransford's loss. See Boling v. Tennessee
State Bank, 890 S.W.2d 32, 36 (Tenn. 1994).
From the record before us, we can infer that the bank's
conduct was the substantial factor in inducing defendant Bransford
to sign the note as a co-maker and thereby incur the resulting
loss.
Because there is a disputed issue of material fact, we are
of the opinion the trial court erred in granting summary judgment.
It therefore results that the judgment is reversed and the cause is
remanded to the trial court for further necessary proceedings.
Costs on appeal are taxed to plaintiff, First American National
Bank.
_____________________________
SAMUEL L. LEWIS, JUDGE
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CONCUR:
___________________________________
HENRY F. TODD, PRESIDING JUDGE,M.S.
CONCURS IN SEPARATE OPINION:
WILLIAM C. KOCH, JR., JUDGE
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