SecurAmerica Bus. Credit v. Schledwitz

SECURAMERICA BUSINESS CREDIT v. KARL SCHLEDWITZ, ET AL

No. W2012-02605-COA-R3-CV

COURT OF APPEALS OF TENNESSEE AT JACKSON

January 23, 2014 Session

Filed: March 28, 2014

Appeal from the Circuit Court for Shelby County

No. CT00180307

Donna M. Fields, Judge

This is the second appeal involving liability on personal guaranties securing the debt of a transportation company. On remand after our first opinion, the trial court found that the transportation company and the lender, through the actions of its president, entered into a conspiracy to violate the Tennessee Consumer Protection Act and violated the duty of good faith and fair dealing, relieving the guarantors of their liability under the continuing guaranties. The trial court, however, declined to hold that the lender and transportation company committed fraud or that the sale of the transportation company from the guarantors to its current owner was a sham. We affirm the trial court's rulings with regard to (1) the actions of the lender's president being imputed to the lender; (2) that the sale of the transportation company was not a sham; (3) that no fraud was committed; and (4) that the guaranties at issue are continuing. We further hold that the trial court was entitled to consider both the underlying credit agreement and the guaranties in determining whether the duty of good faith was breached. However, we vacate the trial court's judgment with regard to its findings of conspiracy, a violation of the Tennessee Consumer Protection Act, and breach of the duty of good faith. We further vacate the trial court's judgment that the guarantors may avoid the obligations under the guaranties. We remand to the trial court for further findings of fact and conclusions of law on these issues. Affirmed in part, vacated in part, and remanded.

Tenn. R. App. P. 3. Appeal as of Right; Judgment of the Circuit Court Affirmed in

Part; Vacated in Part; and Remanded

J. STEVEN STAFFORD, J., delivered the opinion of the Court, in which DAVID R. FARMER, J., and D. MICHAEL SWINEY, J., joined.

W.O. Luckett, Jr., Clarkdale, Mississippi and Lorrie K. Ridder, Memphis, Tennessee, for the appellant, SecurAmerica Business Credit.

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

OPINION

I. Background

This is the second appeal in this case. In the first appeal, this Court remanded to the trial court for further findings of fact and conclusions of law. See SecurAmerica Business Credit v. Schledwitz, No. W2009-02571-COA-R3-CV, 2011 WL 3808232 (Tenn. Ct. App. August 26, 2011) (hereinafter "SecurAmerica I"). On remand, the trial court adopted this Court's "background facts and procedural history . . . as correct," noting that this Court's Opinion was "largely correct." Accordingly, we take the background facts and procedural history from our prior Opinion, with some minor changes to conform to the trial court's findings of fact¹ According to our prior Opinion:

[Appellant] SecurAmerica Business Credit ("SecurAmerica") brought this action on March 27, 2001, against Southland Transportation Co., LLC ("Southland Transportation"), Southland Capital Co. ("Southland Capital"), and Appell[ees] Karl Schledwitz and Terry Lynch. SecurAmerica's claims arose from an alleged default on the September 16, 1999 Secured Revolving Credit Agreement ("Credit Agreement"), which was entered by and between SecurAmerica and Southland Transportation. This Credit Agreement was personally guaranteed by Appell[ees], who were the co-equal owners of Southland Transportation at that time.

When it entered the Credit Agreement, SecurAmerica was a lender licensed by the State of Tennessee under the Tennessee BIDCO² Act, see Tenn.Code Ann. § 45-8-201 et seq., which gave it the authority to make loans to businesses that would not otherwise qualify for traditional financing. SecurAmerica's typical client was a small-to medium-sized business that was highly leveraged and presented a higher level of lending risk. Southland Transportation, a trucking company, was such a business.

The Credit Agreement between SecurAmerica and Southland Transportation was structured as a revolving line of credit and was intended to provide working capital for the trucking company based on the value of certain current assets. To secure the line of credit, SecurAmerica took a security interest in several of the assets of Southland Transportation. The primary assets with value, and the intended sources of repayment, however, were Southland Transportation's working assets, specifically, its accounts receivable.

Per the terms of the Credit Agreement, SecurAmerica lent Southland Transportation money on a revolving basis based on the value of certain current assets (i.e., the "borrowing base"). Consequently, the assets that made up the borrowing base were to be reported, monitored, and evaluated on a daily basis. In order to obtain funds, Southland Transportation submitted daily borrowing base certificates to SecurAmerica. These borrowing base certificates identified the amount of eligible accounts receivable that Southland Transportation maintained on its books.³ Based upon the amount listed on the borrowing base certificates, SecurAmerica would advance monies to Southland Transportation to fund its daily operations. To pay down the loan balance, Southland Transportation maintained a bank account called a "blocked account," into which it directed its customers to send their invoice payments. As these payments accrued in the blocked account, monieswould be wired directly to SecurAmerica to be applied to the balance of the line of credit. This was the basic procedure for lending and repaying monies as outlined in the Credit Agreement.

SecurAmerica I, 2011 WL 3808232, at *1-*2 (footnotes in original). The terms of the Credit Agreement further provide that: "Each Loan Party hereby waives any right to require the Lender to marshal any of the Collateral or otherwise to compel the Lender to seek recourse against or satisfaction of the Liabilities from one source before seeking recourse or satisfaction from another source."

In addition to the Credit Agreement and Promissory Note, Mr. Schledwitz and Mr. Lynch both signed individual Guaranties securing the loan. As explained in SecurAmerica I,

As a condition to lending money to Southland Transportation, SecurAmerica required the interested parties to take additional actions. First, Mr. Schledwitz agreed to sign a Guaranty of Validity of Collateral in favor of SecurAmerica, whereby he guaranteed that the collateral securing the Credit Agreement, specifically the accounts receivable, were bona fide, existing accounts in accordance with the terms of the Credit Agreement. Mr. Schledwitz's Guaranty of Validity of Collateral stated that it was a continuing agreement that remained in effect until any liabilities incurred under the Credit Agreement had been paid in full. Second, Southland Capital, a separate company owned and operated by Appell[ees], signed a Subordination Agreement in favor of SecurAmerica. Southland Capital regularly lent money and infused capital into Southland Transportation as a means of supporting the struggling trucking company. By this Subordination Agreement, Southland Capital agreed to subordinate its rights to repayment by Southland Transportation to the rights of SecurAmerica. Thus, as between SecurAmerica and Southland Capital, the former was to be the senior creditor to Southland Transportation. Third, SecurAmerica required Messrs. Schledwitz and Lynch to sign a personal guaranty in the amount of $500,000 each. The personal guaranties [("the Guaranties")] were identical in substance, and provided, in relevant part, as follows:

The Guarantor hereby (a) unconditionallyand irrevocably guarantees the punctual payment and performance when due (whether at stated maturity, by acceleration or otherwise) of all of the Liabilities up to Five Hundred Thousand Dollars ($500,000) and (b) agrees to pay any and all costs and expenses (including attorney's fees and related expenses) incurred by the Lender in enforcing any rights under this Guaranty.

SecurAmerica I, 2011 WL 3808232, at *2. The Guaranties further provided that:

The liability of the Guarantor under this Guaranty shall be absolute and unconditional irrespective of:

(a) any lack of validity or enforceability of this Guaranty, the Agreement, the Note or any other Loan Documents;

(b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Liabilities, or any amendment or waiver of any term of or any consent to departure from the Agreement or any other Loan Document;

(c) any exchange, release or non-perfection of any collateral, or any release, amendment or waiver of any term of, or consent to departure from, any other guaranty for all or any of the Liabilities;

(d) any failure on the part of the Lender or any other person or entity to exercise, or any delay in exercising, any right under the Agreement or any other Loan Document; or

(e) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Company, the Guarantor or any other guarantor with respect to the Liabilities (including, without limitation, all defenses based on suretyship or impairment of collateral, and all defenses that the Company may assert to the repayment of the Liabilities, including, without limitation, failure of consideration, breach of warranty, fraud, payment, statute of frauds, bankruptcy, lack of legal capacity, statute of limitations, lender liability, accord andsatisfaction, and usury) or which might otherwise constitute a defense to this Guaranty and the obligations of the Guarantor under this Guaranty.

Both the Guaranty of Validity of Collateral and the Individual Guaranties were specifically referenced in the Credit Agreement as exhibits. In addition, the Credit Agreement provided that "THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AMONG THE...