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SecurAmerica Business Credit v. Southland Transportation Co., LLC.

Court of Appeals of Tennessee, Jackson

February 27, 2018

SECURAMERICA BUSINESS CREDIT
v.
SOUTHLAND TRANSPORTATION CO., LLC, et al.

          Session Date: November 14, 2017

         Appeal from the Circuit Court for Shelby County No. CT-001803-07 Donna M. Fields, Judge

         This is the fourth appeal in a case primarily concerned with whether two individual defendants are liable on loan guaranties. Following the third appeal, we remanded the case to the trial court to determine: (1) whether one of the defendants is liable under a Guaranty of Validity of Collateral ("GVC"); (2) whether prejudgment interest should be awarded to the lender on personal guaranties both defendants signed; and (3) whether the lender is entitled to recover additional attorney's fees incurred in enforcing the guaranties since the previous appeal. On remand following the third appeal, the trial court found that the defendant was not liable on the GVC. The trial court also found that the lender was not entitled to prejudgment interest because the lender committed fraud, and it declined to award the lender any additional attorney's fees. Although the defendants prevailed on all three issues, they appeal, seeking reconsideration of this court's determination in an earlier appeal that the defendants failed to prove their claim of fraud, which would relieve them of any liability. The lender counters, insisting that this court's previous decision, wherein we affirmed the trial court's determination that the defendants failed to prove fraud, is the law of the case. The lender also raises its own issues for our consideration, including whether the trial court's findings of fact and conclusions of law concerning fraud, as stated in the final order drafted by counsel for the defendants, reflects the trial court's independent judgment. A careful review of the trial court's oral ruling from the bench and the written order, as well as previous findings of fact made by the trial court, leads us to conclude that some of the findings of fact stated in the final order do not reflect the trial court's independent judgment. Therefore, the presumption under Tenn. R. App. P. 13(d) that a trial court's specific findings of fact are supported by the evidence shall be limited to those findings that appear to reflect the independent judgment of the trial court. We have also determined that the law of the case doctrine precludes us from reconsidering the defendants' claim of fraud. We affirm the trial court's determination that one of the defendants is not liable on the GVC, albeit, on different grounds. We reverse the trial court's decision not to award the lender prejudgment interest and additional attorney's fees, finding that the lender has a statutory right to prejudgment interest and a contractual right to recover reasonable and necessary attorney's fees that the lender incurred to enforce the guaranties. Therefore, we remand for further proceedings consistent with this opinion.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed in Part and Reversed in Part; Case Remanded

          David J. Cocke, Memphis, Tennessee, for the appellants, Terry A. Lynch and Karl Schledwitz.

          William O. Luckett, Jr., Clarksdale, Mississippi, and Lorrie K. Ridder, Indianapolis, Indiana, for the appellee, SecurAmerica Business Credit.

          Frank G. Clement Jr., P.J., M.S. delivered the opinion of the Court, in which J. Steven Stafford, P.J., W.S. and Kenny W. Armstrong, J. joined.

          OPINION

          FRANK G. CLEMENT JR., P.J., M.S.

         Defendants, Karl Schledwitz and Terry A. Lynch co-owned Southland Transportation ("Southland"), a trucking company. In 1999, Southland and SecurAmerica Business Credit ("SecurAmerica") entered into a Secured Revolving Credit Agreement ("Credit Agreement"), whereby SecurAmerica provided a revolving line of credit to Southland, secured primarily by Southland's accounts receivable. Pursuant to the agreement, SecurAmerica made regular advances to Southland based on the day-to-day value of the accounts receivable as evidenced by borrowing base certificates. Southland then directed its customers to send payments to a "blocked account, " which would be wired to SecurAmerica toward satisfaction of the loan.

         Mr. Schledwitz and Mr. Lynch signed personal guaranties in the amount of $500, 000 each, and Mr. Schledwitz signed a Guaranty of Validity of Collateral ("GVC") whereby Mr. Schledwitz, but not Mr. Lynch, guaranteed that the accounts receivable were bona fide, existing accounts. Mr. Schledwitz agreed to pay any damages that proximately resulted from a breach of the agreement. The GVC stated that it remained in effect until Southland paid the loan in full.

         In August 2000, Mr. Schledwitz and Mr. Lynch sold Southland to two employees, Michael Harrell and Michael Lucchesi. Mr. Schledwitz and Mr. Lynch remained liable on their guaranties, and Mr. Schledwitz remained liable on the GVC. Consequently, both Mr. Schledwitz and Mr. Lynch retained the power to inspect Southland's financial records. After the sale of the business, Southland began to suffer financially. To continue to obtain advances from SecurAmerica, Mr. Harrell falsified the accounts receivable on the borrowing base certificates with the knowledge and consent of SecurAmerica's president, Randall Reagan.[1] Thus, SecurAmerica advanced money to Southland based on falsified accounts receivable. In February 2001, Southland ceased doing business and defaulted on the loan.

         In March 2001, SecurAmerica filed a complaint in the Shelby County Chancery Court against Southland, Mr. Schledwitz, Mr. Lynch, Mr. Lucchesi, and Mr. Harrell seeking (1) judgment against Southland on the loan, (2) judgment against all of the defendants for fraud in connection with the falsified accounts receivable, (3) judgment against Mr. Schledwitz and Mr. Lynch on their personal guaranties, and (4) judgment against Mr. Schledwitz on the GVC.

         In their answer, Mr. Schledwitz and Mr. Lynch asserted the affirmative defense of fraud by SecurAmerica. They also alleged that SecurAmerica had (1) breached the implied covenant of good faith and fair dealing, (2) failed to preserve the collateral, and (3) significantly increased the risk of nonpayment by Southland. In addition, they filed a cross-claim against Southland and against Mr. Reagan in both his individual and corporate capacities, alleging conspiracy and fraud. Thereafter, they amended their counterclaim against SecurAmerica and their cross-claim against Southland and Mr. Reagan to allege violations of the Tennessee Consumer Protection Act ("TCPA").

         The case was tried without a jury on January 7 through January 15, 2008. The trial court entered a judgment, finding that Mr. Schledwitz and Mr. Lynch were liable on their personal guaranties; however, SecurAmerica was not entitled to prejudgment interest because SecurAmerica, through Mr. Reagan, committed fraud by participating in the fabrication of Southland's accounts receivable. The trial court determined that SecurAmerica was entitled to attorney's fees pursuant to the attorney's fees provision in the personal guaranties and ordered Mr. Schledwitz and Mr. Lynch to each pay SecurAmerica $125, 000 in fees. The trial court dismissed SecurAmerica's claims against Mr. Schledwitz on the GVC, and also dismissed Mr. Schledwitz and Mr. Lynch's claims under the TCPA. Mr. Schledwitz and Mr. Lynch appealed.

         In the first appeal, we ruled that (1) while the trial court found that SecurAmerica and Southland acted fraudulently, it did not make the specific and consistent findings of fact necessary for this court to review the trial court's decision, and (2) though litigated at trial, the trial court did not address Mr. Schledwitz and Mr. Lynch's affirmative defense that SecurAmerica breached its duty of good faith and fair dealing, which would affect their liability as guarantors. See SecurAmerica Business Credit v. Schledwitz, No. W2009-02571-COA-R3-CV, 2011 WL 3808232, at *13 (Tenn. Ct. App. Aug. 26, 2011). Accordingly, we vacated the trial court's decision and remanded the case for further proceedings. See Id.

         On remand in 2012, the trial court found that the wrongful actions of Mr. Reagan could be imputed to SecurAmerica because Mr. Reagan acted as an agent of SecurAmerica. The trial court further ruled that though Mr. Reagan participated in a scheme with Mr. Harrell to falsify Southland's accounts receivable, Mr. Schledwitz and Mr. Lynch failed to prove that they justifiably relied on Mr. Reagan's misrepresentations, which is an essential element of fraud. Accordingly, the defendants' claim of fraud against SecurAmerica failed. The trial court also relieved Mr. Schledwitz and Mr. Lynch of any liability under their personal guaranties because SecurAmerica, through the acts of Mr. Reagan, violated its duty of good faith and fair dealing by fabricating the accounts. Although the trial court previously dismissed the TCPA claim, the court readdressed the issue and ruled that Southland and SecurAmerica entered into a conspiracy to violate the TCPA. SecurAmerica appealed.

         In the second appeal, we affirmed the trial court's ruling that the actions of Mr. Reagan were imputed to SecurAmerica, and that Mr. Schledwitz and Mr. Lynch failed to prove fraud. See SecurAmerica Business Credit v. Schledwitz, No. W2012-02605-COA-R3-CV, 2014 WL 1266121, at *1 (Tenn. Ct. App. Mar. 28, 2014). On all other issues, we determined that the trial court did not make sufficient findings of fact and conclusions of law. See id. As a consequence, we vacated the trial court's ruling that Southland and SecurAmerica entered into a conspiracy to violate the TCPA and that SecurAmerica breached its duty of good faith and fair dealing. See id. We also vacated the trial court's decision that Mr. Schledwitz and Mr. Lynch were not liable under the guaranties and remanded the case to the trial court to make further findings of fact and conclusions of law on those issues. See id.

         On remand, the trial court again found that Southland and SecurAmerica, through the actions of Mr. Reagan, entered into a conspiracy to violate the TCPA and that SecurAmerica violated its duty of good faith and fair dealing, thereby relieving Mr. Schledwitz and Mr. Lynch of their liability under the guaranties. SecurAmerica appealed.

         In the third appeal, we reversed the trial court's finding that Southland and SecurAmerica's acts affected trade or commerce within the meaning of the TCPA. See SecurAmerica Business Credit v. Southland Transportation, No. W2015-00391-COA-R3-CV, 2016 WL 1292087, at *1 (Tenn. Ct. App. Apr. 1, 2016). Accordingly, we reversed the trial court's determination that Mr. Schledwitz and Mr. Lynch should be released from their guaranties. See id. We remanded the case to the trial court to determine the remaining three issues in the case: (1) whether Mr. Schledwitz was liable under the GVC; (2) whether prejudgment interest should be awarded to SecurAmerica; and (3) whether SecurAmerica was entitled to attorney's fees. See id. at *8.

          Following the third remand, the trial court determined that SecurAmerica "failed to prove that Mr. Schledwitz breached the GVC's terms, failed to prove that any purported breach of the GVC proximately caused [SecurAmerica] to suffer any damages, breached its duty of good faith and fair dealing, and committed fraud against Mr. Schledwitz as to the GVC." The trial court also ruled that SecurAmerica was not entitled to prejudgment interest on the personal guaranties, nor was it entitled to attorney's fees. Some of the reasons for these rulings, as they were explained by the trial court, are stated in more detail below.

         In its final order, the trial court noted that it disagreed with SecurAmerica's arguments concerning Mr. Schledwitz's obligations under the GVC wherein SecurAmerica alleged that although Mr. Schledwitz warranted that Southland's accounts receivable were valid and existing, they were not. Moreover, because the collateral was insufficient to satisfy the loan, Mr. Schledwitz's breach caused SecurAmerica to suffer damages. Contrary to these arguments, the trial court ruled that Mr. Schledwitz was not liable on the GVC because Mr. Harrell and Mr. Reagan altered the contract by agreeing to falsify the accounts receivable. The trial court determined that "[i]t was no longer Mr. Schledwitz's agreement or the agreement that was represented to him or required of him by SecurAmerica." Therefore, Mr. Schledwitz could not be held liable on the GVC. Moreover, the trial court ruled that the fraudulent acts of Mr. Harrell and Mr. Reagan "vitiat[ed] the obligations of Mr. Schledwitz under the GVC."

         SecurAmerica also argued that because the GVC required Mr. Schledwitz to act in good faith with respect to the collateral, he breached the agreement when he transferred and sold equipment used to collateralize the subject loan. The trial court found that Mr. Schledwitz did not breach the GVC by transferring the equipment because "the debt associated with the equipment was owed to another bank, and as a result of the transfer of such equipment, Southland's existing liabilities for ongoing operating expenses decreased."

         Finally, SecurAmerica argued that the GVC required Mr. Schledwitz to assist SecurAmerica with collecting the accounts receivable should Southland default on the loan. When Southland defaulted, Mr. Schledwitz refused to do so. The court ruled that Mr. Schledwitz did not breach that provision in the agreement because SecurAmerica never asked Mr. Schledwitz to assist with collections.

         As to prejudgment interest on the defendants' personal guaranties, the trial court ruled that, under equitable principles, SecurAmerica was not entitled to prejudgment interest because it committed fraud and violated the Business and Industrial Development Corporations ("BIDCO") statute. The trial court reinstated the original 2009 award of $125, 000 in attorney's fees to SecurAmerica, which it incurred in enforcing the personal guaranties, but denied any additional fees. The trial court ruled:

This Court therefore finds, and so orders, that (i) no award of additional attorneys' fees be granted to [SecurAmerica] with regard to any of the appeals taken in this matter, (ii) that [SecurAmerica] be awarded attorneys' fees in the amount of $125, 000 against each of the Defendants, Karl Schledwitz and Terry Lynch, and (iii) that the parties shall be responsible for their own attorneys [sic] fees, costs and expenses with regard to all appeals taken in this matter.

         This appeal followed.

         Issues

         The parties present fifteen issues[2] for our consideration; however, we have consolidated them into five:

1. Should this court reconsider our previous ruling in which we affirmed the trial court's determination that the defendants failed to prove fraud?
2. Did the trial court's findings of fact and conclusions of law in its final order reflect its independent judgment?
3. Is Mr. Schledwitz liable to SecurAmerica for breaching the GVC?
4. Did the trial court err by failing to award prejudgment interest to SecurAmerica?
5. Did the trial court err by failing to award attorneys' fees and expenses to SecurAmerica?

         Standard of Review

         "In all actions tried upon the facts without a jury, the court shall find the facts specially and shall state separately its conclusions of law and direct the entry of the appropriate judgment." Tenn. R. Civ. P. 52.01. If the trial court makes the required findings of fact, appellate courts review the trial court's factual findings de novo upon the record, accompanied by a presumption of the correctness of the findings, unless the preponderance of the evidence is otherwise. Kelly v. Kelly, 445 S.W.3d 685, 692 (Tenn. 2014) (citing Tenn. R. App. P. 13(d)). We review questions of law de novo with no presumption of correctness accorded to the trial court. Kelly, 445 S.W.3d at 692.

         Analysis

         I. Law of the Case -Defendants'Claim of Fraud

         The defendants contend that the trial court concluded that SecurAmerica committed fraud as to the GVC; therefore, we should reconsider our previous ruling in which we affirmed the trial court's determination that the defendants failed to prove fraud. SecurAmerica insists our previous ruling on the defendants' claim of fraud is the law of the case and the ruling cannot be challenged in this appeal. We agree.

          The law of the case doctrine "prohibits reconsideration of issues that have already been decided in a prior appeal of the same case." Memphis Pub. Co. v. Tennessee Petroleum Underground Storage Tank Bd., 975 S.W.2d 303, 306 (Tenn. 1998). While not mandated by our constitution, the law of the case doctrine is "a long-standing discretionary rule of judicial practice, " that "promotes finality and efficiency of the judicial process." Id. Our Supreme Court has explained:

[W]hen an initial appeal results in a remand to the trial court, the decision of the appellate court establishes the law of the case which generally must be followed upon remand by the trial court, and by an appellate court if a second appeal is taken from the judgment of the trial court entered after remand. There are limited circumstances which may justify reconsideration of an issue which was…decided in a prior appeal: (1) the evidence offered at a trial or hearing after remand was substantially different from the evidence in the initial proceeding; (2) the prior ruling was clearly erroneous and would result in a manifest injustice if allowed to stand; or (3) the prior decision is contrary to a change in the controlling law which has occurred between the first and second appeal.

Id.

         The defendants concede that our previous decision is the law of the case, but they argue that our ruling was erroneous and merits reconsideration to avoid a manifest injustice. We disagree.

         In the prior appeal, the defendants contended that the trial court erred by finding that they failed to prove fraud. See SecurAmerica, 2014 WL 1266121, at *21. The issue was thoroughly analyzed in our opinion in ...


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