### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE August 7, 2002 Session
TEXTRON FINANCIAL CORPORATION v. ELAI NE E. POWELL, ET AL 

### .

Direct Appeal from the Circuit Court for Davidson County No. 98C-2652 Walter C. Kurtz, Judge

No. M2001-02588-COA-R3-CV - Filed October 8, 2002

This dispute arises out of a personal guaranty executed by

the de fendan ts sec uring a loan. Following
a trial by jury , the court below awarded the plaintif

f $68,330 in damages plus attorney ’s fees and costs. On appeal, the defendants contend that the court be low erred in apply

ing the parol evidence ruleto evidence whic h would sho w mistake and in not p ermitting

the defe ndants to a

mend thei

r answer . We reve

rse the ju dgment e

ntered b elow and

remand f or a new trial. Tenn. R. App.P. 3 Appe al as of Right ; Judgme nt of the Cir

cuit Cour

t Rever sed; and Remanded

D AV ID R. F ARMER , J., delivered the opinion of the cour t, in w hich W. F RANK C RAWFORD , P.J., W.S., and H OLLY K. L ILLARD , J., joined. Stephen C. Knight, Nashville, Tennessee, for the appellants, ElaineE. Powell a nd John E. Pow ell.
Melissa Blackburn, Nashville, Tennessee, for the appellee, Textron Financial Corporation.

OPINION

In 1995, Textron Financial Corp. (Textron), entered into an agree ment with SBT, Inc. (SBT), to consolidate financi ng of sev eral pieces of trucking equipment. The e quipment was in the possession of Royal Transpor t(Royal), which be gan making the loan pay ments to Textron. In 1997, Trailer Lea se purch ased the

equipmen

t from Roy

al, and T extron and

Trailer Lea se (Elai ne Powell , preside nt) entere d into a

security ag

reement with Textron securing a $183,993.73 installment note. Collateral securin g the no te includ ed sever al vehic les, a tractor and several trailers. John and Elaine Powell (the Powells) executed personal guarantee s on the note. The 1997 transaction included a disbursement

by Textron

to itself of $156,427.54 of the $183,993.73 note. The additional $27,993 repres ents interest on the 1997 note collected in advance. The Powells paid $104,000 on the note and stopped making pay

ments after

June of 1998. In September of 1998, Textron filed a complaint agains tthe Powel ls to enforce the guarantee agreement, alleging

Trailer Lease

had defaulted on the 1997 note. Textron prayed f or damages of $72,854,40.-2-

The Powells contend that the note had been paid i n f ull. They submit that the 1997 agree ment with T extron wasto refinancethe equipment for the amount due on the 1995 note, and that Textron re

present ed that the amount outstandin g on th e 1995 note was $156,427.54. They f urther contend that the distribution of this amount from proceeds of the 1997 note by Textron t o itself was intendedto pay off the 1995 note. The Powells allege that Textron mistakenly represented the amount

due on the 1995 note, and that the actual amount due was $80,0 00. They

accord ingly argue that because the outsta

nding a mount on the 1995 note

was only $80,000, t

he rema ining sum s paid by Trailer Lease should have been applied against the principal under the ter ms of the loan agree ment. The disbursement

sheet, which was signed by the Powells, does not indicate the amount due on the

1995 note

or for what purpose the $156,427.54 disbursement was made. Textron does not dispute th at p roceeds from the 1997 note included amounts to “close out” the 1995 note, but submits that the disbursement sheet is silent as to how the sums were to be disbursed.

The trial court

refused to admit evidence of how much was due on the 1995 note or of how Textron disbursed the $156,427.54 to itself. The cou rt concluded that the written agreeme nt between Textron and the Po wells was unambiguo us on its face, and that the parol evidence rule ther efore operated to exclude extrinsic evidence to vary the contr act. Regarding the possibility of mistake, the court stated,
[o]f course plaintiff cont ends t hat there was no mistake. Therefore, e vidence showing that t he refi nanced amoun t was ‘ wrong’ was not admissible to impeach the signed documents, despite Mr. and Ms. Powell[s’] insistence.

. . . There is no proof here that the plaintiff or

its agents entered into the contract based upon any mistake.

The court also declined to grant Powells’ oral motion, made on the morning of trial, to a mend thei r answer to include the affirmative defense s of misrepresentation and fraudulent inducement.

Th e cause w as hear

d by a jury in June of 20 01. The ju ry awarde d Textron da

mages o f $68, 330, reducing the amount demanded by Textron based upon proof that Textron had failed t o entirely mitigate its damages. Textron was also awarded $22,000 in a ttorney’s fees and costs

. The Powells’ motion for

a new trial, and Textron’s motion for judgment in accordance with its motion for directed verdict or, in the alternative, a n additur, were denied. Appeal to this Court ensued.

Issues The issues raised by

the Powells for our review, as we perce ive them are:

I. Whether th

e trial c ourt err

ed in its ap

plication of the pa rol evide nce rule when it excluded evidence regarding the amount due on the 1995 note and evidenc e of how T extron disb ursed $15 6,427.54 o f proce eds from the 1997 n ote to itself.-3-

II. Whether th

e trial c ourt err

ed in deny

ing Powe lls’ requ est to ame

nd their
answer to include

the defe nse of fr audulent induceme

nt.
Textron raises the additional issue of whether the trial court erred in de nying its amende d motion for judgment in accordance with a motion for a directed verdict or, in the alternative, for an additur. Standard of Review The issues presented for our review in this case a re issues of law. Our review of the trial court’s conclusi ons of law in a jury trial is de novo upon the record, with no presumption of
correctness. Te

nn. R. App. P. 13(d); Campbell v. Fl orida Stee l Corp ., 919 S.W.2d 26, 28 (Tenn. 1996). Denial of the Powells’ Motion to Amend Their Answer

We first a ddress the issue of

whether the trial court er red whe n it refus ed the Pow ells’ motion to amend their answer to include a defense of fr audulent inducement. The Tennessee Rules of Civil Procedure provide:

A party may

amend the party ’s pleadings once as a matter of c ourse at any time before a responsive pleading is served or, if the pleading is one to which no responsi ve plead

ing is pe rmitted a nd the ac tion has no t been se t for tria l, the par ty may so amend it at any

time within

15 day s after i

t is serve d. Other

wise a pa rty may amend the pa

rty’s pleading s only by

written consent of the adverse party or by leave of

the court; and leave shall be freely given when justice so requires.

Tenn. R. Civ. P. 15.01 This rule mandates that motions to amend shall be liberally granted unless the amendment would result in an injustice to the opposing party or is irrelevant to any

claim or defense. Walden v. W

ylie , 645 S.W.2d 2

47, 250 (T enn. Ct. Ap

p. 1982). Factor s which wo uld justify a refus al by

the trial court to p ermit an a

mendment

include b ad faith ; an undue delay in filing; lack of notice or undue prejudice to the opposing party; repe ated failure to cure deficiencies by

previous amendments; futility of the amendme nt. Id. Rule 15.01 is premised on the fact that pleadings function primarily as a notice mechanism. Id. Accord ingly , if leav e to amend is granted close to the trial date, the cour t must grant a continuance in order to allow the opposing party

sufficient time to address the new issue. Id.

In the present case, th e Powells s ought le ave to am end their answer to include

a defen se of mistake, misrepresentation or fraudulent inducement on the morning of trial. The trial court granted the motion regarding mistake, but denied leave to amend to include fraud or1 Pow ells’ oral moti on to a mend made a t the begi nni ng of tri al r eques ted l eave t o add the def enses of mutual mist ake, misrepresentati on, and fraudulent i nducement. In denying the motion, the tri al c ourt st ated, “I t

hin k you alr eady

– if I recal l, your

answ er, you already all eged mutual mistake.” Counsel f or Powells responded, “Okay. But also I think fraud or misr epresent ation need to be added to t hat ju st out

of precaut

ion.” The answer did not incl ude a defe nse of mistake however, although the court init ially operated under the belief that it did. Any error whi ch might have res ult ed from this belief was avoided , however, as the co urt su b sequently specif ically granted leave to amend to include the defense of mist ake. The court stat ed, “Well, I thi nk I’ ll a llow y ou to amend to i nclude i t [mut ual mis take]. ”
-4- misrepresentation. 1 The court observed that if leave were granted to add fraud and misrepresentation, the lawsuit would be so broadened as to nece ssitate a trial continuance. Counsel for the Powells stated, “I don’t think any body wants a continuanc e. We want to get on with this thing. . . . I

f [yo ur Honor is] telling

me that y ou would on

ly g rant [the m

otion to amend] along with a continuance of this trial, then I will withdraw it.” We agree with the court below that had lea ve to amend been granted on the morning of trial to permit the Powells to add a defense of fraudulent inducement or misre presentation, justice would have required a continuance of the tr ial. The record reflects that the Powells withdrew their motion to amend to include misrepresentation or fraudulent inducement in order to a void a cont inua nce. The Po well s’ as sign ment o f err

or on this i ssue is the refo re without

meri t. We accordingly

affirm on this issue. Exclusion of

Evidence Based on the Parol Evid ence Rule We next turn to the issue of whether the trial court erred in refusing to admit evidence of the amount due on the 1995 note and the disbursement of $156,427.54 of the 1997 note from Textron to itself. The Powells contend that the 1997 note was intended in essence to be a transfer of indebtedness for the same equipment pre viously owned by

SBT. Thus $156,427.54 was disbursed from Textron to itself in order to pay off the 1995 note. The Powells contend that the pa rties were mi stake n, how ever, r egardin g the ba lance d ue on t he 199 5 not e. They all ege Textron had indicated that they would re view the records regar

ding pay ment of the 1995 note and make an adjustment if necessary . The Powells further submit that during the course of discovery Textron re

fused to p rovide in formatio n rega

rding th e princi pal amoun

t due fro m SBT, and

that it
wa s o nl y af

te r e xa mi ni ng th e r ec or ds of Ro yal Tr an sp or ta ti on , w hi ch ha d g on e i nt o b an kr up tc y, that they discovere d that the balance due was in fact $80,000. The Powells contend tha t the indebtedness for the equipment had therefore a lready been paid, and that the $156,427.54 transfer from Textron to itself to close out the 1995 note resulted in an overpay ment of the amount due. The Powells’ arg

ument on a

ppeal, a s we per

ceive it, is that it wa s error for the tr ial cour t to exclude evidence of the amount due on the 1995 note and the disbursement of $156,427.54 because such evidence proves a mistake regarding the amount of indebte dness actually due on the equip ment.
Textron contends that the Powells waived the defense of mutual mistake because the defense does not appear in the Powells’ answer to the Second Amended Complaint. The Tennessee Rules of Civil Procedure require-5-

[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity . Malice, intent, knowledge, and other condition of mind of a person may be averred gener

ally.
Tenn. R. Civ. P. 9.02. We note, however, that the Powells’ oral motion to amend their answer included the defense of mistake, and that they averred that the mistake pertained to the amount due on the 1995 loan to SBT which was, in essence, transfe rred to Trailer Le ase. The trial court decline d to gra

nt the motio n as to misr

eprese ntation a nd fraud ulent indu cement w ithout a continuance of the trial, and the Powells withdrew the motion pertaining to these defenses rather than accept a continuance. As noted above , however, the trial court granted the Powells’ motion to amend to include the defense of mistake. The defe nse accordingly

is not waived. Textron further argues that the lawsuit pertains only to the 1997 note, and that the 1995 note is a c ompletely

distinct tr

ansacti on betwe en separ

ate par ties. I t argue s that the 1 997 note and guarantee are

unambiguous on their face and that extrinsic evidence of the 1995 note or of how Textron disbursed the $156,427.54 to itself are therefore inadmissible. Textron does concede, however, that procee ds of the 1997 note were used to “close out” the 1995 note, and that the $156,427.54 was disbursed for that purpose. The essence of Textron’s argument, as w e perceive it, is that evidence of the amount due on the 1995 note is extrinsic to the 1997 agreement, and that the 1997 agr eement must be enforced as written because its terms ar e clear and unambiguous. Powells’ arg ument, as perceived by

this Court, is that while the terms of the 1997 note are unambiguous, the purpose of the 1997 note was to transfer a pre-existing debt of SBT to Powells, and tha t proof of the amount due on the 1995 note is admissible to show a mistake regarding the a mount actually due Textron for the equipment. The trial court excluded evidence of the 1995 note and how the $156,427.54 was disbu rsed fr om Textron t

o itself ba sed on the

parol evidence r

ule. Afte r examining

Powells’ offer of proof, the court stated found no evidenc e that Textron made a mistake regarding the amount due. A guaranty

in a commercial transaction will be construed as strong ly ag ainst the guarantor “as the sense will admit.” Farmers-Peoples Bank v. Clemmer , 519 S.W.2d 801, 805 (Tenn. 1975). Upon examination of the 1997 note, security agreement, and gua

rantee by the Powells, we find their terms unambiguous, and extrinsic evidence is not admissible to explain or vary those ter

ms. Id. at 804. However, in the present action, the Powells seek not to explain or modify the unambiguous te rms of the written agreement with Textron. They do not submit that the agreed upon terms or obliga tions under the contract were other than those which a ppear on the face of the documents. Rather, Powells arg ue that the distribution of $156,427.54 by Textron to itself was intended to pay of f the 1995 note, and that this amount reflects a mistake rega rding the amount actually due

on the 1995 note. The par ol evidence rule

serves t o secure the integ rity of contr acts and to guar d again st fraud by a party who agr ees to the unambig uous term s of a wri

tten ag reemen t and then seeks to-6-

disavow those terms through extrinsic evidence. 32A C.J.S. Evidence § 1132, § 1159 (1996); see Tidwe ll v. Morgan Bldg. Sys., Inc

. , 840 S.W.2d 373, 376 (Tenn. Ct. App. 1992). Accord ingly , the cour

ts have r efused t o permit a

lteratio n of unamb iguous c ontract ual terms through the use of extrinsic or parol (oral) evidenc e. Id. The rule encompasses contracts of guaranty . 32A C.J.S. Evidence § 1165 (19 96). How ever, a pplicatio n of the pa

rol evide nce rule includes many exceptions. Id. at § 1194; see Huffine v. Riadon , 541 S.W.2d 414 (Tenn. 1976). Once such exception to the parol evidence rule is that extrinsic evidence is admissible to show fraud or mistake. See id

. In order to be admissible to show mistake, the mistake must be shown to be clerical or mutual, or, if unilateral, to have resulted f rom fraud or other inequitable conduct. 32A C.J.S. Evidence § 1234. A mutual mistake is one where both parties are operating under the same misconception. Id. The cont ract as written, theref

ore, is no t an expre ssion of the partie s’ actual intent. Id. When parol evidence is offered not to vary or disavow the terms of the contract, but to show an alleged fraud or mistake, this Court is hesitant to exclude the evidence. See Maxwell v. Land Dev., Inc. , 485 S.W.2d 8 69, 877 (T enn. Ct. Ap p. 1972); Rentenbach Eng’g Co. v. General Realty, Ltd. , 707 S.W.2d 5 24, 527 (T enn. Ct. Ap p. 1985); Decatur County Bank v. Duck , 926 S.W.2d 393, 397 (Tenn. Ct. App. 1997). Thus the rule has been considerably r

elaxed by the courts “in orde r that fraud may

be thwarted, mistakes corrected, accidents relieved against, trusts set up and enf orced, and usury

exposed and eliminated.” Gibson’s Suits in Chancery, § 189 (William H. I nman ed., 6 th ed. 1982).
In this case, the disbursement sheet is silent as to how Textron disbursed over $156,000 of proceeds to itself. Textron acknowledges, howe ver, that the purpose of the disbursement was to “close out” the 1 995 note. Thus the e ssence o f the ag reemen t was that Trailer Lea se would borrow funds from Textron, which Textron would then disburse to itself, in order to pay off the 1995 note. The additional sums represent interest collected in advanc e. It is undisputed that the 1997 note did not serve to finance additional equipment other than that transfer red from Roya

l Transport. Proof introduced to show that the amount due on the 1995 note was in fact $80,000 would ser ve not to va

ry the contr act, but t o show mista

ke reg arding

the amoun

t of indeb tedness remaining on the equipment. Accordingly , we hold that evidence of the amount due on the 1995 note and of how Textron disbursed the $156,427.54 to itself is not barred by the parol evidence rule. Judgment of the

trial cou rt on this is sue is the

refore revers ed. We re

mand for a new tri al.

Conclusion We affirm the decision of the trial court deny ing the Powells leave to amend their answer on the morning of trial to include the affirmative defe nses of misrepresentation or fraudulent inducement. Judgment of the trial court excluding evidence of the 1995 note e xecuted by Textron and SBT and evidence of how $156,427.54 in proceeds f rom the 1997 note were disburse d by

Textron to itself is r

everse d. This ca

use is re manded f or a new trial con sistent wit

h this opinion . In li ght of th e foreg oing, Te

xtron’s ass ignment

of erro r rega rding th e trial c ourt’s-7-

denial of a judgment in accordance with its motion for directed verdict or, in the alternative, an additur, is pretermitted. Costs of this appeal are taxed to the appellee, Textron Financial Corp.

___________________________________ DAVID R. FARMER, JUDGE