IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
SPECTRA PLASTICS, INC., and )
J. GOODMAN ASSOCIATES, INC.,
Plaintiffs/Appellants,
)
)
) Shelby Circuit No. 71878-9 T.D.
FILED
) July 26, 1999
VS. ) Appeal No. 02A01-9805-CV-00121
) Cecil Crowson, Jr.
NASHOBA BANK, ) Appellate Court Clerk
)
Defendant/Appellee. )
APPEAL FROM THE CIRCUIT COURT OF SHELBY COUNTY
AT MEMPHIS, TENNESSEE
THE HONORABLE ROBERT L. CHILDERS, JUDGE
JOHN E. TOMA, JR.
NEWMAN, FREYMAN & KLEIN, P.C.
St. Louis, Missouri
JERRY SCHATZ
MONYPENY, SIMPSON, WALKER & SCHATZ
Memphis, Tennessee
Attorneys for Appellants
LEO BEARMAN, JR.
EUGENE J. PODESTA, JR.
BAKER, DONELSON, BEARMAN & CALDWELL
Memphis, Tennessee
Attorneys for Appellee
AFFIRMED
ALAN E. HIGHERS, J.
CONCUR:
W. FRANK CRAWFORD, P.J., W.S.
DAVID R. FARMER, J.
Spectra Plastics, Inc. (“Spectra”) has appealed from the trial court’s grant of
summary judgment to Nashoba Bank (“Nashoba”) in this lender liability lawsuit. Based
upon the following, we affirm the trial court’s grant of summary judgment to Nashoba.
I. Facts and Procedural History
This lender liability lawsuit against Nashoba was originally commenced on August
14, 1995 by Spectra, along with John E. Goodman, Sr., W. Cooper Sandusky, III, Donald
G. Taylor, and Charles L. Cox, Jr., based upon Nashoba’s alleged involvement in Spectra’s
collapse on February 17, 1995, at which time Spectra’s business ceased operating. On
October 10, 1995, Nashoba filed a motion to dismiss the individually named plaintiffs
(Goodman, Sandusky, Taylor, and Cox), which was subsequently granted by the trial court
-- subject to an allowance for the filing of an amended complaint within thirty days. Though
such an amended complaint was thereafter filed by John E. Goodman, Sr., Mr. Goodman’s
claims were later dismissed without prejudice. On the same date that Mr. Goodman’s
claims were dismissed, “J. Goodman & Associates, Inc.” (“JGA, Inc.”) was “joined as a
Party Plaintiff” and allowed to file a complaint. JGA, Inc.’s claims were then dismissed,
however, on February 13, 1997. The dismissal of JGA, Inc.’s claims was not made to be
a final judgment pursuant to Rule 54.02 at that time. Additionally, on February 13, 1997,
Spectra was allowed to file an amended complaint. Spectra’s complaint, as amended,
separately set forth the following stated causes of action: breach of contract, breach of
obligation of good faith and fair dealing, tortious interference with business expectancy,
promissory misrepresentation, conversion, breach of fiduciary obligation, false pretenses,
and fraudulent misrepresentation.
On August 8, 1997, Nashoba moved for summary judgment. In accordance with
Rule 56.03 of the Tennessee Rules of Civil Procedure, Nashoba’s motion was
accompanied by a separate “statement of the material facts as to which [Nashoba]
contends there is no genuine issue for trial.” See TENN. R. CIV. P. 56.03. Thereafter,
Spectra filed its response to Nashoba’s statement of material facts. The following
summary of facts (material or otherwise) “as to which . . . there is no genuine issue for
2
trial,” stems from our review of these pleadings, and of the portions of testimony and/or
other proof within the record cited in these pleadings. 1
Nashoba is a Tennessee corporation that operates as a commercial bank, with its
principal offices in Germantown, Tennessee. Spectra is a Mississippi corporation that was
formed in July of 1992, and its original shareholders were Charles Cox, Don Taylor, and
Howard Rudd, who each originally contributed $500.2 Spectra was in the business of
manufacturing injection molded plastic parts. It operated out of a leased facility in Arlington,
Tennessee, and leased the equipment needed for its manufacturing process from
Mitsubishi Corporation.
Nashoba and Spectra began dealing with each other in 1992, at which time
Nashoba loaned Spectra $50,000 for the purpose of providing working capital for the
startup business. On August 28, 1992, Spectra executed a $100,000 promissory note as
a working capital line of credit. In July of 1993, Spectra was unable to meet its working
capital needs from ongoing operations. In an effort to meet those working capital needs,
John A. Goodman invested in Spectra, in the initial amount of $100,000, and became its
principal shareholder and Chairman of its Board of Directors.
On or about August 24, 1993, Spectra and Nashoba agreed to increase Spectra’s
working capital line of credit at Nashoba to $300,000, and executed a promissory note
(hereafter referred to as “Note 1392"), a copy of which was attached to Nashoba’s
statement of material facts, establishing the same.3 Note 1392 provided that the principal
1. Thes e “facts a s to which . . . there is no genuine issue for trial” are based upon Nashoba’s statement of
material facts, combined with either S pectra’s agreem ent that pa rticular facts are undisputed (regardless of
whether the agreement is only for the purpose of Nashoba’s motion fo r sum ma ry judg me nt), or Spe ctra’s
failure to demonstrate that particular facts are disputed by appropriate citation to the record (assuming the
facts, where disputed, were initially supported by Nashoba by appropriate citation to the record). See T E N N .
R. C IV . P. 56.03.
2. Add itiona lly, Spectra ’s ame nded c omp laint explains that, “[a]t all times pertinent hereto, Cox and Taylor
were stockholders, officers, and directors of Spe ctra.”
3. Note 1392 sets forth, in pertinent part, the following:
“I” includes each b orrowe r ....
“You m eans th e lender ....
....
PAYMENTS: I agree to pay this note as follows:
3
balance was due on demand, but, if no demand is made, then on August 23, 1994. The
security agreement executed by Spectra in connection with Note 1392 provided, in part,
that, for as long as any amount remained outstanding, Spectra would arrange to direct all
payments due on accounts receivable to a post office box for deposit at Nashoba. This
“lock box” arrangement that was agreed to had previously been explained to Spectra by
written correspondence from Nashoba dated August 18, 1993, at which time Nashoba
explained:
We would set up a post office box to which your customers would remit. The
only effect on them would be that payments to Spectra ... would be going to
a different post office box. We have someone who goes by the Post Office
twice a day to check for mail and brings it directly to the tellers who log them
in a book, run the deposits into your account and fax you a copy of all items
in the mail received. They also put the originals in the mail to you the same
day.
During most of the time that Spectra was in business, it experienced cash flow
difficulties as a result, at least in part, of undercapitalization and of production not living up
to expectations. Spectra’s income statements reflect that it continually experienced
Interest: I agree to pay accrued interest on demand, but if no demand is made
monthly beginning September 23, 1993
Princ ipal: I agree to pay the principal on demand, but if no demand is made than on
August 23, 1994
....
No modification of this agreement may be made without your express written cons ent. T ime
is of the es sence in this agree men t.
....
SET-OFF: I agree that you may set off any amount due and payable under this note against
any right I have to received money from you.
“Right to receive money from you” means:
(1) any deposit account balance I have with you;
....
DEFAULT: I will be in default if any one or more of the following occur: (1) I fail to make a
payment on time or in the amount due; ... (5) I ... become insolvent (either because my
liabilities excee d my as sets or I am unable to pay my d ebts as they become due); ... (7) I do
or fail to do something which causes you to believe that you will have difficulty collecting the
amo unt I owe yo u; ....
REMEDIES: If I am in default on this not you have, but are not limited to, the following
remedies:
(1) You may de man d imm ediate pa ymen t of all I owe you under this note (princ ipal,
accrued unpaid interest and other acc rued charges).
(2) You may set off this debt against any right I have to the payment of money from you,
subject to the terms of the “Set-Off” paragraph herein.
....
(3) You may refuse to make advances to me or allow purchases on credit by me.
....
By waiving your right to declare an event to be a default, you do not waive your right to later
consider the event a default if it continues or happens again.
....
WAIVER: I give up my rights to require you to do certain things. I will not require you to:
(1) demand payment of am ounts due (presentm ent);
(2) obtain official certification of nonpayment (protest); or
(3) give notice that amounts due have not been paid (notice of dishonor).
4
significant monthly losses up through September, 1994, at which point Spectra’s losses
from operations totaled $662,248. Though Spectra finally experienced operating profits
during the months of October and November of 1994 (collectively totaling $152,445), its
total losses from operations at the end of these months was still $509,803, after which
Spectra again began to experience monthly losses. After January 1995, Spectra’s total
losses from operations was again up to $617,053. Moreover, between August 1993 and
January 1995, Spectra’s net worth deteriorated from $76,785 to negative $300,286 (though
a few incremental changes as viewed on a monthly basis were temporary increases in net
worth). As of May 27, 1994, Spectra ceased paying compensation to Cox, Taylor, and
Rudd, who were corporate officers, until such time as Spectra became profitable. As of
May 30, 1994, Spectra was in arrears to Olsten Corporation in the amount of $81,107.48
for temporary personnel services. Over this period of time, Olsten was one of roughly 67
trade creditors that Spectra failed to pay timely. By April of 1994, Spectra was in default
under the terms of its lease for its plant facility, and had requested a moratorium on rent
payments due to its financial difficulties.
On August 23, 1994, Note 1392 became due and payable, though Spectra made
no payment at that time. Later, however, on November 9, 1994, December 7, 1994, and
February 7, 1995, Nashoba debited Spectra’s checking account for the payment of
accrued interest that remained unpaid by Spectra on Spectra’s indebtedness to Nashoba.
In September of 1994, Spectra defaulted under the terms of its equipment leases
with Mitsubishi. This default prompted MAC Funding Corporation (Mitsubishi’s assignee
as to Mitsubishi’s rights under the leases) to notify Spectra that MAC was exercising its
right to accelerate the entire balance due on seven equipment leases, which totaled
$1,652,631.40 as of September 22, 1994.4 For the quarters ending September 30, 1994
and December 31, 1994, Spectra was unable to pay its federal payroll tax liability when
due. Moreover, by the end of the quarter ending March 31, 1995 (after Spectra ceased
4. MAC Funding subsequently agreed to forbear the exercise of its rights, however, conditioned upon
Spe ctra’s ongoing cooperation in disclosing specified information to MAC Funding, and conditioned upon
Spectra ’s future c omp liance with th e term s of the lea ses.
5
business operations), Spectra’s federal payroll tax liability totaled over $110,000.
On February 1, 1995, John E. Goodman, Chairman of the Board of Directors of
Spectra, told D. W. McGaughey, President of Nashoba, that he expected that if Spectra
could not collect on one particular customer account (Duracraft), then Spectra would be
unable to continue business operations beyond February. 5 On February 2, 1995,
Goodman again spoke with McGaughey, and similarly mentioned that, if Spectra could not
collect from Duracraft, then he expected Spectra to file a bankruptcy petition shortly. At
this time, Goodman also asked McGaughey if Nashoba would advance additional funds
to cover Spectra’s upcoming payroll, to which McGaughey declined. On February 15,
1995, Spectra failed to pay wages due its employees (i.e., it failed to make its payroll).
During the first part of February, Nashoba’s Board of Directors decided that any
money that came into Spectra’s checking account should be debited from the account and
applied against Spectra’s unpaid indebtedness from its line of credit. On February 15,
1995, this decision was communicated by McGaughey to Goodman (i.e., Spectra). On
February 16, 1995, a meeting took place between Spectra and Nashoba representatives.
At this point, Spectra had just directly received two accounts receivable payment checks,
which totaled $71,187.74, that had not been directly deposited into Spectra’s account in
accordance with the “lock box” provision of the parties’ security agreement. At this
meeting, Spectra representatives appealed to Nashoba to allow Spectra to deposit the
funds and use the funds to meet payroll and other obligations. At the meeting’s end,
Nashoba’s representatives agreed to revisit the issue with its Board of Directors (though
there were “no guarantees” that Nashoba would reverse its prior decision), provided the
funds were deposited.
On February 17, 1995, at approximately 12:00 noon, Cox delivered to the Nashoba
Bank offices the checks for deposit and renewed his request that Spectra be allowed to
5. Goodman, however, further advised McGaughey that, in order to collect from Duracraft, which was
dependant upon S pectra for its parts, h e would th reaten to termina te business dealings with Duracraft, and
even thre aten to pe rhaps s hut dow n opera tions or file ba nkrup tcy.
6
use the funds to pay other obligations. A response was requested by 2:00 p.m. Upon
receipt of the funds (and Spectra’s renewed request with its 2:00 p.m. “deadline”),
McGaughey polled three of the four members of the executive committee to the Board of
Directors,6 which acted upon such loan issues in cases where, among other things, the full
board could not be brought together. These three members, which included McGaughey,
Charles Perkins, and William Watkins, decided to debit the funds on deposit and apply
them to Spectra’s past due indebtedness. As such, the funds were debited from Spectra’s
account and applied to the outstanding loan balance, at which point Spectra was promptly
notified of Nashoba’s decision. There still remains, however, an outstanding amount owed
on Note 1392.
Aside from the above facts “as to which . . . there is no genuine issue for trial,” the
following other factual allegations are raised by Spectra’s amended complaint (which either
are not rebutted by Nashoba’s “statement of material facts,” along with the supportive proof
therein cited, or remain genuinely disputed via contradicting proof within the record).
At no time during 1993 or 1994 did Nashoba Bank voice any displeasure with
or concerns about the manner in which Spectra was managing its business
or its loans at Nashoba Bank.
....
[B]ased upon the volume of purchase orders in hand, Spectra was projecting
[a substantial increase in] sales volume ... and profits of $698,500.00 for the
calendar year 1995. In the opinion of Cox, Taylor, Goodman and Sandusky,
Spectra had “turned the corner” and was headed toward substantial and
sustained profitability.
....
In August, 1994 [(when Note 1392 matured)] ... the outstanding balance ...
was $281,618.42.
....
Thereafter, Cox and Taylor had both meetings and telephone conversations
with their loan officer at Nashoba Bank, Ray Mullins. In addition, Goodman
had a number of conversations with D. W. McGaughey, President of
Nashoba Bank. At none of these meetings did any representative of
Nashoba Bank indicate to Cox, Taylor, or Goodman that the Bank had any
problems with the Spectra loans. Further, no representative of Nashoba
Bank ever stated that Loan No. 1392 was in default.[7]
....
[O]n October 13, 1994, ... McGaughey specifically stated: “Don’t worry about
it. Make the interest payments. What we want to do is to get you to a point
6. The fo urth exe cutive co mm ittee me mbe r was ou t of town.
7. Spectra had, however, received a notice from Nashoba shortly after Note 1392's maturity requesting
payment in full, after whic h Cox contacted Ray Mullins, who was Nashoba’s commercial loan officer
resp ons ible for handling Spectra’s accounts. Mullins advised Cox that Spectra should continue to pay interest
only on the outstanding balance of Note 1392, and t hat th ey wo uld “work on” getting Loan No. 1392 renewed.
7
where we can convert it (Loan No. 1392) over to a term loan.” Neither
McGaughey nor Mullins indicated that Nashoba Bank had any problems with
the Spectra loan and neither individual stated that this loan was in default.[8]
....
However, unbeknownst to Goodman, Cox and Taylor, Nashoba Bank was
concerned about its loans to Spectra. During 1993 and 1994, and
specifically from and after August, 1994, at numerous board meetings and
loan committee meetings, representatives of Nashoba Bank expressed
concerns about the status of Spectra loans. The Board was specifically
concerned about how Nashoba Bank was going to get out of the loans and
how Spectra was going to pay off Loan No. 1392. Further, the Spectra loans
appeared in late 1993 on a monthly “watch list” prepared by Nashoba
Bank.[9] Notwithstanding these concerns, no one at Nashoba Bank
expressed any problems or concerns with anyone at Spectra concerning
Loan No. 1392 and the other Spectra loans.
....
Throughout November and December, 1994 and January, 1995, ... no
representatives of Nashoba Bank ever stated that Loan No. 1392 was in
default or ever made any demand for payment on such loan.[10]
....
[O]n February 14, 1995, [(after Nashoba had debited Spectra’s account for
the payment of unpaid accrued interest without notice to Spectra following
Spectra’s deposit of funds into the previously overdrawn account)] Taylor,
Cox, and Goodman met with D. W. McGaughey .... Goodman told
McGaughey that he wanted to know how the Bank would treat future
deposits in Spectra’s account. Taylor, Cox, and Goodman wanted
McGaughey’s assurances that Spectra would be able to use any funds
deposited in Nashoba Bank, and that the Bank would not continue to “debit”
the account without Spectra’s knowledge.
....
McGaughey did not provide a clear answer. He stated that he believed
Nashoba Bank was still willing to work with Spectra, but that the accounts
receivable loan would probably need to be converted into an installment loan
and that he needed a plan whereby Spectra would begin to pay down its
accounts receivable line.
....
Goodman told McGaughey that he would be meeting with Duracraft on
February 15, 1995 and that he expected to receive payments in excess of
$70,000 from Duracraft and Sunbeam within the next couple of days.
However, Taylor, Cox, and Goodman told McGaughey that these funds
would be needed first to pay ... 19 checks previously dishonored by Nashoba
Bank, to make the February 15, 1995 payroll, and to pay certain outstanding
utility bills. They told McGaughey that after these payments, Spectra would
have approximately $10,000 to apply against Loan No. 1392. McGaughey
said he would present Spectra’s proposal to Nashoba Bank’s Board of
Directors the following morning.
....
On February 15 and 16, 1995, Spectra received checks ... totaling
$71,187.74. However, [as mentioned earlier] on February 15, 1996,
McGaughey also informed Goodman that the Board had instructed him to
8. But cf. note 7 supra.
9. Spectr a had been regu larly liste d on t his int erna l mo nthly “w atch list” be ginnin g De cem ber, 1 993 . This
“watch list,” which listed numerous other accounts or loans aside from Spectra’s indebtedness, provided an
estimation of the amount that the bank would lose if Spectra’s account was “liquidated” (i.e., it listed the extent
to whic h Sp ectra ’s indebtedness was not secured by accounts receivable or some other form of collateral).
In December 1993, this loss estimation was $1 8,900. By November, 1994, this loss estimation had increased
to $62,40 0.
10. But cf. note 7 supra.
8
apply any funds deposited in Spectra’s account to pay down the accounts
receivable loan.
....
[A] meeting was scheduled for 3:00 p.m. on February 16, 1994.
....
Cox, Taylor and McPherson attended the meeting on behalf of Spectra.
McGaughey and ... Doug Scott attended the meeting on behalf of Nashoba
Bank. .... Cox and Taylor explained to Scott and McGaughey that failure to
make payroll would doom the company. .... Despite repeated requests by
Cox and Taylor that Nashoba Bank commit to [Spectra’s] proposed use of
these funds, Nashoba Bank refused to issue such a commitment.
....
McGaughey ... stated that Nashoba Bank was willing to continue to work with
Spectra, provided that Spectra was willing to make a show of “good faith.”
McGaughey explicitly stated that Spectra’s deposit of the $71,187.74 in its
Nashoba Bank account would constitute such an act of “good faith.”
McGaughey told the Spectra representatives that he would “favorably
recommend” these proposals to the Board of Directors if and after Spectra
deposited the $71,187.74 in its Nashoba Bank account.
....
The meeting was ... joined by Charlie Perkins, an attorney and member of
the board of directors of Nashoba Bank. .... Perkins stated that although he
could “make no assurances,” he would also recommend Spectra’s proposal
to the Board of Directors. However, Perkins also made it clear that Spectra’s
failure to deposit the $71,187.74 in its Nashoba Bank account would result
in the immediate termination of Nashoba Bank’s working relationship with
Spectra. Further, Perkins reiterated ... that Nashoba Bank needed a show
of “good faith” from Spectra and that the Bank would consider the deposit of
the $71,187.74 to be such a show of “good faith.”
....
During the meeting, Doug Scott, who had been introduced to the Spectra
representatives as the new loan manager over the Spectra loans, stated that
the $71,187.74 was the property of Nashoba Bank. Scott stated repeatedly
that Spectra’s failure to deposit the funds would constitute a breach of
Spectra’s loan covenants with Nashoba Bank.
....
After the meeting, Cox, Taylor, and Goodman decided that Spectra had no
choice but to deposit the funds in its Nashoba Bank account. In reaching
this conclusion, these individuals specifically relied upon Perkins’ and
McGaughey’s statement that they would take Spectra’s proposal to the
Board of Directors and favorably recommend such proposal. ....
Accordingly, ... on February 17,1995, Spectra delivered checks totaling
$71,187.74 to Nashoba Bank.
....
After depositing the funds ... the Bank ... debited Spectra’s checking account
in the amount of $70,934.49, and ... applied these funds against Loan No.
1392. Cox and Taylor also learned that Nashoba Bank was making demand
for the balance due under this loan.
....
As a result of Nashoba Bank’s debiting Spectra’s account and applying
$70,934.49 to the accounts receivable loan, Spectra was unable to make its
payroll on February 17, 1995. .... Spectra’s inability to make this payroll
resulted in the immediate destruction of the Company. On February 17,
1995, at 7:00 p.m., Spectra was forced to cease operations and close its
doors.
On February 6, 1998, the trial court granted Nashoba’s motion for summary
9
judgment.11 On February 25, 1998, Spectra filed a motion to alter or amend, which was
denied by the trial court on April 3, 1998. Thereafter, on April 22, 1998, Spectra filed a
Notice of Appeal.
On appeal, Spectra asserts that the trial court erred in its grant of summary
judgment to Nashoba as to Spectra’s misrepresentation and contract claims. Spectra has
not asserted any error to the extent that summary judgment was granted as to Spectra’s
claims regarding “tortious interference with business expectancy,” conversion, and “breach
of fiduciary obligation.”
II. Analysis
J. Goodman & Associates, Inc.’s Claims
Before reviewing the trial court’s summary judgment ruling as to Spectra’s claims,
we find it necessary to address one preliminary matter. The “appellant(s)” brief that was
submitted to this Court in this case was titled “Brief of Plaintiffs/Appellants Spectra Plastics,
Inc. and J. Goodman Associates, Inc.” Moreover, this brief sets forth in its statement of
issues the following:
Did the trial court err in granting Defendant Nashoba’s Motion to Dismiss the
claim of Plaintiff JGA where JGA set forth in its Complaint allegations that
Nashoba affirmatively misrepresented the true status of its banking
relationship with Spectra in order to induce JGA to loan or otherwise invest
funds in Spectra?
Neither this issue nor the party raising this issue (JGA, Inc.), however, is properly before
this Court. Rule 3(f) of the Tennessee Rules of Appellate Procedure expressly requires,
“The notice of appeal shall specify the party or parties taking the appeal . . . .” TENN. R.
APP. P. 3(f). This requirement accords with the purpose of the notice of appeal, which “is
simply to declare in a formal way an intention to appeal.” T ENN. R. APP . P. 3 advisory
comm’n comments. The only notice of appeal that was filed in this case, however,
11. The trial court’s order that granted summary judgment to Nashoba further denied a motion for partial
summ ary judgment that had been filed by Spectra. This motion for partial summary judgment, which had
been filed o n July 14, 1997 , was lim ited to the iss ue of liability on some of Spectra’s claims. Spectra, howeve r,
has no t raised an y issue on appea l as to the trial co urt’s denia l of its mo tion for par tial sum mar y judgm ent.
10
expressly specified Spectra as an appealing party, and did not declare JGA, Inc.’s intention
to appeal in any manner.12 Accordingly, review of the trial court’s dismissal of JGA, Inc.’s
claims is not properly before this Court, and we will hereafter address only those issues
relating to Spectra’s claims. Cf. State v. City of Murfreesboro, No. 01-A-01-9404-
CH00195, 1994 WL 585678 at *2 (Tenn. App. Oct. 26, 1994) (“there is no provision [in the
Tennessee Rules of Appellate Procedure] permitting one of two plaintiffs who join their
separate suits in a single action to appeal the dismissal of both suits without the joinder of
both plaintiffs in the notice of appeal and appeal bond”).
Spectra’s Misrepresentation Claims
Spectra has asserted on appeal that the trial court erred in granting Nashoba’s
motion for summary judgment as to Spectra’s misrepresentation claims. Specifically,
Spectra alleges that Nashoba, through its representatives: (1) misrepresented and/or
failed to disclose the status of its banking relationship with Spectra; (2) misrepresented an
intent to forbear collection of Spectra’s loans; and (3) misrepresented its intent with regard
to the funds that were deposited on February 17, 1995.
As this Court explained in Axline v. Kutner, 863 S.W.2d 421 (Tenn. App. 1993), an
action for fraudulent misrepresentation contains four elements:
(1) an intentional misrepresentation of material fact, (2) knowledge of the
representation’s falsity, and (3) an injury caused by reasonable reliance on
the representation. The fourth element requires that the misrepresentation
involve a past or existing fact or, in the case of promissory fraud, that it
involve a promise of future action with no present intent to perform.
Nondisclosure will give rise to a claim for fraud when the defendant has a
duty to disclose and when the matters not disclosed are material.
Id. at 423 (citations omitted) (quoting Dobbs v. Guenther, 846 S.W.2d 270 (Tenn. App.
1992)).
Initially, we find no merit in Spectra’s first asserted instance of misrepresentation --
12. Similarly, the motion to am end that e xtende d the tim e within wh ich Spe ctra was required to file its notice
of appe al was ex pressly filed o nly by Spectra .
11
that Nashoba misrepresented or failed to disclose its banking relationship with Spectra.
First, we note that Spectra’s brief suggests that “Nashoba breached its duty to inform
Spectra that the bank considered Loan No. 1392 to be in default from and after August 23,
1994.” We reject Spectra’s suggestion that any such duty existed, as Note 1392 was, by
its own express terms, “in default,” regardless of whether Nashoba expressed its view on
the status of Note 1392. Second, Spectra’s brief suggests that Nashoba had failed to
inform Spectra that it had kept Spectra’s loans listed on a “watch list,” and failed “to inform
Spectra that [Nashoba’s] Board of Directors had soured on the banking relationship.” The
facts before us, however, indicate clearly that both Spectra and Nashoba were acutely
aware of Spectra’s significantly distressed financial condition. As to the time period
relevant to Spectra’s collapse, Nashoba appropriately states in its brief:
When a company owes a bank over $281,000; when that company cannot
pay its vendors, landlord, equipment suppliers, employees, or tax collectors;
and when that company states to its bankers that its doors [may] close ...
and that a bankruptcy petition [may be] forthcoming, that company’s officers
know, or reasonably should know, that its banker will be concerned.
Therefore, we reject Spectra’s suggestion that Nashoba “failed to inform Spectra” of such
matters. Third, aside from Spectra’s contentions that Nashoba breached a duty to disclose
in these regards, Spectra further asserts that Nashoba affirmatively misrepresented the
status of the parties’ banking relationship. We similarly reject any such claim, however,
because an essential element in any case of misrepresentation is justifiable or reasonable
reliance. Speaker v. Cates, 879 S.W.2d 811 (Tenn. 1994). The facts before us convince
us that no reasonable factfinder could find that Spectra justifiably relied on any earlier
statements by Nashoba concerning the “status” of the parties’ banking “relationship.” As
we have stated, both Spectra and Nashoba were acutely aware of Spectra’s significantly
distressed and deteriorated financial condition, and, while the facts suggest that Spectra
might have actually known that Nashoba was concerned about Spectra’s financial
condition, Spectra’s officers at least reasonably should have known that Nashoba was
concerned. Accordingly, there exists no genuine issue of material fact for submission to
the fact-finder as to these matters.
As mentioned above, Spectra also asserts that Nashoba misrepresented an intent
12
to forbear collection on Spectra’s indebtedness. This is based upon Nashoba’s statement
that Spectra should not “worry” about paying off the full amount of its debt to Nashoba.
This statement, however, was made at a time when the full amount of the note first
became due, at which point the statement was qualified upon the premise that Spectra
would continue to pay monthly interest, and upon the premise that the outstanding principal
would be converted over to an acceptable term loan, whereby the outstanding principal
would begin to be paid off. Spectra, however, failed to pay its monthly interest over the
following several months -- causing Nashoba to debit Spectra’s account in November
1994, December 1994, and February 1995. Moreover, no agreement as to an acceptable
term loan was ever reached between the parties during this time. As such, no reasonable
factfinder could conclude that Nashoba’s original statement (for Spectra not to “worry”), as
construed as of the time the statement was made, was an intentional misrepresentation
of a material fact upon which Spectra ultimately justifiably relied. See Axline, 863 S.W.2d
at 423. Furthermore, we find it significant that Note 1392 contains a “no oral modification”
clause which provides that Note 1392 cannot be modified unless Nashoba gives its written
consent to such modification.
As to Spectra’s claim of misrepresentation regarding the February 17 deposit, we
find this claim to be without merit. By the express terms of the parties’ contract, Spectra
had a contractual obligation to deposit those funds with Nashoba.
It is said to be immaterial that one is induced by false representations to do
what he is bound to do. A person who has been induced to do that which
the law would have otherwise required him to do cannot claim to have been
defrauded. In other words, one suffers no damage where he is fraudulently
induced to do something which he is under legal obligation to do, such as
pay a just debt ... or perform a valid contract.
37 AM . JUR . 2d, Fraud and Deceit § 295 (1968). Moreover, Nashoba had a contractual
right to use the February 17 deposit funds as a set-off against the debt owed to Nashoba
by Spectra. Accordingly, we find that the trial court correctly granted summary judgment
in favor of Nashoba on this issue, as well.
Spectra’s Contract Claims
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Spectra asserts three claims relating to the parties’ contracts. First, Spectra
contends that Nashoba waived its right to demand payment on Note 1392 through course
of conduct. Second, Spectra contends that Nashoba violated Tennessee Code Annotated
section 47-1-203's obligation of good faith in the performance and enforcement of
contract.13 Third, Spectra contends that Nashoba violated a common law duty of good
faith.
As to Spectra’s first argument, Note 1392 establishes that any waiver by Nashoba
of its right to declare an event to be a default does not waive its right “to later consider the
event as a default if it continues or happens again.” Furthermore, Note 1392 establishes
that Spectra waived its right to notice and demand for payment. As such (and contrary to
Spectra’s assertion), Nashoba did not waive its right to demand payment or to set off
Spectra’s debt without first providing notice. We note that our conclusion is consistent with
Tennessee Code Annotated section 47-50-112(c), which provides, “If any . . . note . . . or
other contract contains a provision to the effect that no waiver of any terms or provisions
thereof shall be valid unless such waiver is in writing, no court shall give effect to any such
waiver unless it is in writing.” Tenn. Code Ann. § 47-50-112(c) (1995) (emphasis added).
Although Note 1392 does not contain a provision to this precise effect, Note 1392 does
provide that the terms of the note cannot be modified except in writing. 14 Accordingly, we
conclude that Note 1392's “no oral modification” clause should be given effect according
to the parties’ express agreement, and find that Nashoba had the right to enforce the past
due obligation of Spectra.
As stated above, Spectra also asserts that Nashoba violated Tennessee Code
Annotated section 47-1-203, which imposes an obligation of good faith and fair dealing
upon parties in the performance or enforcement of contracts. See Tenn. Code Ann. § 47-
1-203 (1996). The official comments to this statute, however, explain that this statute
13. Spectra also attempts to rely upon Tenn. Code Ann. section 47-1-208 for its assertion that Nashoba
violated its statutory ob ligations. W e sum ma rily reje ct Sp ectra ’s relia nce upon this statute, however, because
it is inapposite to the facts and circumstances of this case, as it applies to acceleration provisions and there
was no acceleration of the debt in this case.
14. See supra note 3.
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“does not support an independent cause of action for failure to perform or enforce in good
faith.” Id.
The Tennessee Supreme Court has recently discussed at length and expounded
upon the obligation of good faith with respect to contracts in the case of Wallace v.
National Bank of Commerce, 938 S.W.2d 684 (Tenn. 1996). In Wallace, the Court quoted
from the case of TSC Industries, Inc. v. Tomlin, 743 S.W.2d 169, 173 (Tenn. App. 1987),
in summarizing the law of good faith as follows:
“It is true that there is implied in every contract a duty of good faith and fair
dealing in its performance and enforcement, and a person is presumed to
know the law. What this duty consists of, however, depends upon the
individual contract in each case. In construing contracts, courts look to the
language of the instrument and the intention of the parties, and impose a
construction which is fair and reasonable.”
Id. at 686 (citation omitted). The Wallace court cited with approval the case of Bank of
Crockett v. Cullipher, 752 S.W.2d 84, 91 (Tenn. App. 1988) for the proposition that “good
faith in performance is measured by the terms of the contract.” Id. In Wallace, the court
held that because the language in the contract at issue clearly allowed the defendant
bank’s actions, there was no bad faith on the part of the defendant bank as it performed
the contract according to its terms. Id. at 687. Similarly, in the case at bar, the contract
between Spectra and Nashoba clearly states and reflects the intent of the parties. Due to
the express agreement between the parties, Spectra could expect that, at some point,
Nashoba would demand payment and/or exercise its set-off rights as it had done in the
past. Pursuant to the authority of Wallace, “Performance of a contract according to its
terms cannot be characterized as bad faith.” Id. at 687. Nashoba had every right under
the terms of its clear and unambiguous loan documents with Spectra to attempt to collect
on the debt owed to it by Spectra by deducting the amounts owed to it from Spectra’s
account without providing prior notice to Spectra.
III. Conclusion
Based upon the foregoing, the judgment of the trial court is hereby affirmed. Costs
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on appeal are taxed to Spectra for which execution may issue, if necessary.
HIGHERS, J.
CONCUR:
CRAWFORD, P.J., W.S.
FARMER, J.
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