Blake Burton v. Hardwood Pallets, Inc. ( 2001 )

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
August 28, 2001 Session
BLAKE BURTON, ET AL. v. HARDWOOD PALLETS, INC., ET AL.
Appeal from the Circuit Court for Hamilton County
No. 98C1394 Samuel H. Payne, Judge
FILED DECEMBER 13, 2001
No. E2001-00547-COA-R3-CV
This appeal involves a dispute between the sellers of a business and the bank that financed a portion
of the purchase price. The plaintiffs, Blake Burton and Michael Burton, entered into an agreement
with the defendant, Hardwood Pallets, Inc.,1 to sell the Burtons’ pallet manufacturing business. As
partial consideration for the sale, Hardwood Pallets executed an unsecured promissory note to the
Burtons in the amount of $1,000,000. Additional consideration for the sale was obtained by way of
an $800,000 loan from the defendant, AmSouth Bank, to Hardwood Pallets; as a part of the bank
transaction, Hardwood Pallets pledged its assets as collateral. As a condition to the making of the
loan, AmSouth required the Burtons to execute a subordination agreement. When Hardwood Pallets
defaulted on the bank loan, AmSouth sold the collateral at a private sale. Litigation ensued. In
addition to suing Hardwood Pallets and its shareholders, the Burtons sued AmSouth, alleging
procurement of breach of contract and civil conspiracy to defraud. AmSouth filed a counterclaim,
alleging that the Burtons breached the subordination agreement. It also filed a motion for summary
judgment, asserting that it acted within its rights under the subordination agreement. The trial court
entered a judgment in favor of AmSouth pursuant to Tenn. R. Civ. P. 54.02. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
Affirmed; Case Remanded
CHARLES D. SUSANO, JR., J., delivered the opinion of the court, in which HERSCHEL P. FRANKS and
D. MICHAEL SWINEY, JJ., joined.
Michael A. Anderson, Chattanooga, Tennessee, for the appellants, Blake Burton and Michael
Burton.
Donald J. Aho, Chattanooga, Tennessee, for the appellee, AmSouth Bank.
OPINION
1
Hardwo od P allets, Inc., is no t a party to this app eal.
I. Background
In 1997, the Burtons and Hardwood Pallets entered into negotiations for the sale of the
Burtons’ pallet manufacturing business. The asset purchase agreement executed by the Burtons and
Hardwood Pallets provides for a total purchase price of $2,498,920, comprised of the following
elements: $800,000 to be paid in cash; a $1,000,000 unsecured promissory note payable over 96
months; 72 equal monthly payments of $9,012.77 in exchange for the Burtons’ covenant not to
compete; and $50,000 to be paid immediately after the closing. To finance the purchase, Hardwood
Pallets sought a loan from AmSouth Bank, pledging its assets as collateral. AmSouth agreed to
make the loan, conditional upon it receiving a first security interest in the collateral and the execution
by the Burtons of a subordination agreement in favor of AmSouth. Prior to closing, AmSouth
transmitted copies of all closing documents, including the proposed subordination agreement, to the
Burtons’ counsel.
At the closing on December 12, 1997, the Burtons executed the subordination agreement in
AmSouth’s favor. The subordination agreement provides, in pertinent part, as follows:
2. Subordination of Debt. Subject to the provisions of paragraph 5
hereof, Junior Creditor2 hereby postpones and subordinates all of the
loans, advances, indebtedness, liabilities and other obligations of
Debtor owing to Junior Creditor (or any of them), whether direct or
indirect, absolute or contingent, due or to become due, now existing
or hereafter arising including, without limitation, the indebtedness,
liabilities and obligations owing under the asset purchase
agreement...to the full and final payment and discharge of all loans,
advances, indebtedness and other obligations of Debtor owing to
Senior Creditor....
* * *
4. Negative Covenants. For so long as this Agreement is in
effect...Junior Creditor shall not demand, collect, sue for, accelerate
the maturity of or accept from Debtor or any other person any
payment (other than a payment permitted by paragraph 5 hereof) or
any property (including the Collateral) on account of the Junior Debt
or any part thereof or realize upon or enforce any lien on or interest
in any property (including the Collateral) securing the Junior Debt....
2
The subordination agreement refers to the Burtons as the “Junior Creditor” and the debt owed to them as the
“Junior Debt”; AmSo uth is referred to as the “Senior Creditor” and the debt owed to it as the “Senior Debt.” Hardwood
Pallets is referred to as the “Debtor.”
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5. Permitted Payments. Provided no event of default occurs or exists
under any instrument or agreement now or hereafter evidencing or
securing the whole or any part of the Senior Debt...and no event
exists which with notice or lapse of time would constitute any such
event of default, Debtor may pay and Junior Creditor may accept and
retain any regularly scheduled payments due and owing to Junior
Creditor from Debtor under the Junior Documents in accordance with
the payment terms thereof, but without prepayment or payment upon
acceleration. From and after the occurrence of any such event of
default...or any event which with notice or lapse of time may
constitute such an event of default, Debtor shall not make, and Junior
Creditor shall not request, demand, accept, collect, or sue for any
payment on account of the Junior Debt except to the extent expressly
authorized by Senior Creditor.
* * *
8. Waivers. Debtor and Junior Creditor each hereby waives any
defense based on the adequacy of a remedy at law which might be
asserted as a bar to the remedy of specific performance of this
Agreement in any action brought therefor by Senior Creditor. To the
fullest extent permitted by law, Debtor and Junior Creditor each
hereby further waives: presentment, demand, protest, notice of
protest, notice of default or dishonor, notice of payment or
nonpayment and any and all other notices and demands of any kind
in connection with all negotiable instruments evidencing all or any
portion of the Senior Debt or the Junior Debt to which Debtor or
Junior Creditor may be a party; the right to require Senior Creditor to
marshall any property (including, without limitation, any Collateral);
the right to require Senior Creditor to enforce any security interest or
lien Senior Creditor may now or hereafter have in any property
securing the Senior Debt, or to pursue any claim it may have against
Junior Creditor, any guarantor of the Senior Debt, or any other person
or entity, as a condition to Senior Creditor’s entitlement to receive
any payment on account of the Junior Debt or exercising any other
rights under this Agreement; notice of the acceptance of this
Agreement by Senior Creditor; notice of any loans made, extensions
granted or other action taken in reliance hereon; and all other
demands and notices of every kind in connection with this
Agreement, the Senior Debt or the Junior Debt. Junior Creditor
assents to any release, renewal, extension, modification, compromise,
or postponement of the time of payment of the Senior Debt, to any
substitution, exchange or release of Collateral therefor, to the addition
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or release of any person primarily or secondarily liable thereon, and
to the extension of all Senior Debt whether now or hereafter existing.
* * *
14. Default and Enforcement. ...[I]n the event of a breach by either
the Debtor or Junior Creditor in the performance of any of the terms
of this Agreement or any instrument or agreement evidencing or
securing the Senior Debt or the Junior Debt,...all of the Senior Debt
shall, at the option of Senior Creditor, become immediately due and
payable without presentment, demand, protest, or notice of any
kind.... At any time Junior Creditor fails to comply with any
provision of this Agreement that is applicable to Junior Creditor,
Senior Creditor may demand specific performance of this
Agreement,...and may exercise any other remedy available at law or
equity. Without limiting the generality of the foregoing, if Junior
Creditor, in violation of this Agreement, shall institute or participate
in any action, suit or proceeding against Debtor, Debtor may interpose
as a defense or dilatory plea this Agreement and Senior Creditor is
irrevocably authorized to intervene and to interpose such defense or
plea in Debtor’s name. If Junior Creditor attempts to enforce or
realize upon any Collateral in violation of this Agreement, Debtor or
Senior Creditor...may by virtue of this Agreement restrain such
realization or enforcement....
Approximately six months after the closing, Hardwood Pallets defaulted on its payments to
the Burtons. The Burtons subsequently brought this action against Hardwood Pallets, alleging
breach of contract and default on the promissory note.3
On February 11, 1999, AmSouth conducted a private foreclosure sale and sold the collateral
to Hardwood Acquisition, LLC, an entity in which Hardwood Pallets’ former shareholders held a
minority interest. The Burtons were not given notice of the sale, and they received no funds from
it. AmSouth lost $60,689.34 on the sale of the collateral not counting interest, attorney’s fees, and
selling expenses. Following the sale, the Burtons amended their complaint to add AmSouth as a
defendant,4 alleging that AmSouth (1) procured the breach of the asset purchase agreement and
promissory note between the Burtons and Hardwood Pallets and (2) conspired to defraud the
Burtons. AmSouth responded and asserted a counterclaim, alleging that the Burtons breached the
subordination agreement by instituting the instant action against it and Hardwood Pallets.
3
The Burtons also sued the shareholders of Hardwoo d Pallets, Robert McK enzie and Edwin Reeves, alleging
procurement of breach of contract, and fraud/negligent misrepresentation. Those claims are not before us on this app eal.
4
Hardwood Acq uisitions, LLC, w hich later changed its name to Pa llet Reso urces, LLC , was also added as a
defendant; however, that entity is not a party to this ap peal.
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AmSouth subsequently filed a motion for summary judgment and requested that any further
discovery be stayed pending resolution of its motion. Thereafter, the Burtons filed a motion to
amend their complaint to allege that the defendants, including AmSouth, had conspired to commit
a fraudulent conveyance. The trial court stayed any further discovery and consideration of the
Burtons’ motion to amend pending resolution of the summary judgment motion. On January 31,
2001, the trial court granted AmSouth summary judgment. The trial court also denied the Burtons’
motion to amend, noting that the amendment would be futile in light of its finding “that AmSouth
was statutorily and contractually allowed to liquidate the [c]ollateral in the manner in which it did
and that the Plaintiffs’ fraudulent conveyance claim is simply another attempt by the Plaintiffs to
challenge the sale when they have no legal right to do so.” This appeal followed.
II. Standard of Review
Our standard of review of a grant of summary judgment is well-settled. Our inquiry involves
only a question of law, with no presumption of correctness as to the trial court’s decision. Robinson
v. Omer, 952 S.W.2d 423, 426 (Tenn. 1997); Byrd v. Hall, 847 S.W.2d 208, 210 (Tenn. 1993). The
moving party – in this case, AmSouth – has the initial burden of producing competent, material
evidence reflecting that there are no genuine issues of material fact and that it is entitled to summary
judgment as a matter of law. See Byrd, 847 S.W.2d at 211. In evaluating the evidence in the
summary judgment context, we must view the evidence in the light most favorable to the nonmoving
party, and we must draw all reasonable inferences in favor of that party. Id. at 210. Summary
judgment is appropriate only when there are no genuine issues of material fact and when the
undisputed material facts entitle the moving party to a judgment as a matter of law. Tenn. R. Civ.
P. 56.04; Byrd, 847 S.W.2d at 211.
III. Grant of Summary Judgment to AmSouth
AmSouth argues that the grant of summary judgment was proper because, in selling the
collateral, it acted at all times within its statutory rights as a secured creditor and its contractual rights
under the subordination agreement. Furthermore, it argues that the subordination agreement
precludes the Burtons from bringing this action. The Burtons, while not disputing AmSouth’s status
as a secured creditor or the validity of the subordination agreement, insist that the grant of summary
judgment to AmSouth was not appropriate because, so the argument goes, (1) AmSouth breached
its duty of good faith under the subordination agreement; (2) AmSouth conspired with the other
defendants to defraud the Burtons; and (3) AmSouth induced Hardwood Pallets’ breach of contract.
We will address each of these arguments in turn.
A. Breach of Duty of Good Faith
Tennessee common law imposes a duty of good faith in the performance of every contract.
Wallace v. National Bank of Commerce, 938 S.W.2d 684, 686 (Tenn. 1996); TSC Indus., Inc. v.
Tomlin, 743 S.W.2d 169, 173 (Tenn. Ct. App. 1987). While acknowledging that AmSouth had the
right to sell the collateral following Hardwood Pallets’ default, the Burtons argue that AmSouth
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nevertheless breached its implied duty of good faith by “concealing” the sale from them and by
knowingly using “its superior position to assist Hardwood Pallets in eliminating the debt owed to
the Burtons.” The Burtons contend that the duty of good faith obligated AmSouth to “at least...
notify the Burtons about the proposed sale and permit them to bid on the assets, or it should have
refrained from selling the assets to an entity connected with Hardwood Pallets.”
We do not agree with the Burtons that AmSouth’s failure to give notice of the sale
constituted a breach of the duty of good faith implied in the subordination agreement. Upon
Hardwood Pallet’s default, AmSouth, as a secured creditor, was entitled to dispose of the collateral
by public or private sale in order to satisfy the indebtedness owed it, see T.C.A. § 47-9-610 (2001),
and the Burtons, as unsecured creditors, were not entitled to notice of the sale. See T.C.A. § 47-9-
611(c) (2001). Moreover, the Burtons expressly waived any right to notice in the subordination
agreement. Because AmSouth acted in accordance with its statutory and contractual rights, it cannot
be said that its actions were in bad faith. See, e.g., Wallace, 938 S.W.2d at 687.
We also do not agree that AmSouth’s sale of the collateral to Hardwood Acquisition, LLC,
constituted a breach of the duty of good faith. The subordination agreement did not give the Burtons
any more rights in the collateral than they had by statute or common law. As unsecured creditors,
they have no interest in the collateral. As such, they were not entitled to notice of the sale, see id.,
and they have no standing to challenge the manner in which it was sold. See T.C.A. § 47-9-625(c)
(2001). Therefore, we find the plaintiffs’ argument to be without merit.
B. Conspiracy to Defraud
The Burtons argue that the defendants had a common purpose to defraud them and that
AmSouth “assisted in the parties’ plan.” They further argue that the subordination agreement does
not shield AmSouth from liability for its fraudulent conduct.
The tort of conspiracy to defraud is defined as a “combination between two or more persons
to accomplish by concert an unlawful purpose, or to accomplish a purpose not in itself unlawful by
unlawful means.” Chenault v. Walker, 36 S.W.3d 45, 52 (Tenn. 2001) (quoting Dale v. Thomas
H. Temple Co., 186 Tenn. 69, 90, 208 S.W.2d 344, 353 (1948)). To be liable, “[e]ach conspirator
must have the intent to accomplish this common purpose, and each must know of the other’s intent.”
Brown v. Birman Managed Care, Inc., 42 S.W.3d 62, 67 (Tenn. 2001).
In opposition to AmSouth’s motion for summary judgment, the Burtons submitted the
affidavit of Blake Burton and bank records to establish the following facts, which, they assert,
establish AmSouth’s fraudulent conduct:
1. AmSouth was involved in the transaction from the beginning and
insisted on certain terms being included in the parties’ asset purchase
agreement.
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2. No one informed the Burtons that their debt would not be
collateralized.
3. During the closing, Reeves, a shareholder of Hardwood Pallets,
and a bank representative left the closing and unspecified changes
were made to the closing documents.
4. After five months, AmSouth instructed Hardwood Pallets not to
make any more payments to the Burtons.
5. After Hardwood Pallets’ default, AmSouth arranged the private
foreclosure sale of the debtors’ assets to an entity in which Reeves
and McKenzie, another shareholder of Hardwood Pallets, had a 20%
ownership interest. Other owners of the company were customers of
the Bank, and AmSouth entered into a new loan with the company.
6. Internal bank records state and acknowledge that the private sale
would deprive Hardwood Pallets of its ability to pay its unsecured
debt to the Burtons. Nevertheless, AmSouth gave them no notice of
the sale.
These facts, when viewed in a light most favorable to the Burtons, do not create a genuine
issue of material fact as to the Burtons’ conspiracy claim against AmSouth. The stated facts do not
establish, directly or inferentially, that AmSouth had an intent to defraud the Burtons or that it knew
of any fraudulent intent on the part of the other defendants. Most of the Burtons’ allegations relate
to actions that AmSouth was lawfully entitled to take by virtue of its status as lender and first priority
secured creditor. At best, these facts establish that AmSouth knew that by selling Hardwood Pallets’
assets to satisfy its secured debt, the Burtons’ unsecured debt would go unsatisfied. This, however,
does not amount to fraudulent conduct.
By way of a separate issue, the Burtons argue that the trial court erred in not allowing the
Burtons to amend their complaint to additionally allege that AmSouth conspired to commit a
fraudulent transfer of the collateral. The factual basis of this additional claim is essentially the same
as the facts relied upon by the Burtons to support their conspiracy to defraud claim. The trial court
found that the proposed amendment would be futile in light of its grant of summary judgment on the
conspiracy to defraud claim. We agree that the amendment would be futile. “The futility of an
amendment is clear when granting it would prolong the litigation, but almost certainly not lead to
a different ultimate result.” Welch v. Thuan, 882 S.W.2d 792, 794 (Tenn. Ct. App. 1994). We
therefore affirm the trial court as to this issue.
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C. Inducement of Breach of Contract
Next, the Burtons argue that AmSouth is not entitled to summary judgment as to their claim
that AmSouth induced a breach of the contract between the Burtons and Hardwood Pallets. They
assert that AmSouth induced a breach of the contract by directing Hardwood Pallets not to make
further payments to the Burtons.
The subordination agreement provides AmSouth with the right in the event of a default to
demand that Hardwood Pallets make no further payments to the Burtons on the unsecured debt and
that the Burtons “shall not request, demand, accept, collect, or sue for any payment” without
AmSouth’s express consent. Clearly, AmSouth was operating within its rights under the
subordination agreement when it directed Hardwood Pallets to terminate its payments to the Burtons.
The Burtons contend, however, that even if AmSouth had the contractual right to direct the
termination of payments, it did so in bad faith. We disagree. “Performance of a contract according
to its terms cannot be characterized as bad faith.” Wallace, 938 S.W.2d at 687. The trial court
properly granted AmSouth summary judgment as to this claim.
IV. Staying of Discovery
The Burtons’ final issue relates to the trial court’s decision to stay discovery pending the
resolution of AmSouth’s motion for summary judgment. We find no reversible error in the staying
of discovery pending that motion. We agree with AmSouth’s position that no amount of discovery
would have changed the subordination agreement and the other relevant facts implicated by the
Burtons’ claims, none of which facts are really in dispute. Simply stated, the plaintiffs’ theory of
recovery is not made out by these undisputed facts; however, these facts do clearly establish
AmSouth’s right to a judgment in summary fashion. The trial court did not err in staying discovery.
See Leatherwood v. United Parcel Serv., 708 S.W.2d 396, 402 (Tenn. Ct. App. 1985).
V. Conclusion
The judgment of the trial court is affirmed. This case is remanded for collection of costs
assessed below, pursuant to applicable law. Costs on appeal are taxed to the appellants, Blake
Burton and Michael Burton.
_______________________________
CHARLES D. SUSANO, JR., JUDGE
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