IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

August 7, 2002 Session

TEXTRON FINANCIAL CORPORATION v. ELAINE 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 defendants securing a loan. Following

a trial by jury, the court below awarded the plaintiff $68,330 in damages plus attorney’s fees and

costs. On appeal, the defendants contend that the court below erred in applying the parol evidence

rule to evidence which would show mistake and in not permitting the defendants to amend their

answer. We reverse the judgment entered below and remand for a new trial.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Reversed; and

Remanded

DAVID R.FARMER,J., delivered the opinion of the court, in which W.FRANK CRAWFORD,P.J.,W.S.,

and HOLLY K. LILLARD, J., joined.

Stephen C. Knight, Nashville, Tennessee, for the appellants, Elaine E. Powell and John E. Powell.

Melissa Blackburn, Nashville, Tennessee, for the appellee, Textron Financial Corporation.

OPINION

In 1995, Textron Financial Corp. (Textron), entered into an agreement with SBT, Inc. (SBT),

to consolidate financing of several pieces of trucking equipment. The equipment was in the

possession of Royal Transport (Royal), which began making the loan payments to Textron. In 1997,

Trailer Lease purchased the equipment from Royal, and Textron and Trailer Lease (Elaine Powell,

president) entered into a security agreement with Textron securing a $183,993.73 installment note.

Collateral securing the note included several vehicles, a tractor and several trailers. John and Elaine

Powell (the Powells) executed personal guarantees 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

represents interest on the 1997 note collected in advance. The Powells paid $104,000 on the note

and stopped making payments after June of 1998. In September of 1998, Textron filed a complaint

against the Powells to enforce the guarantee agreement, alleging Trailer Lease had defaulted on the

1997 note. Textron prayed for damages of $72,854,40. 
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The Powells contend that the note had been paid in full. They submit that the 1997

agreement with Textron was to refinance the equipment for the amount due on the 1995 note, and

that Textron represented that the amount outstanding on the 1995 note was $156,427.54. They

further contend that the distribution of this amount from proceeds of the 1997 note by Textron to

itself was intended to 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 $80,000. They accordingly

argue that because the outstanding amount on the1995 note was only $80,000, the remaining sums

paid by Trailer Lease should have been applied against the principal under the terms of the loan

agreement. 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 that proceeds 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 court concluded that the written agreement between

Textron and the Powells was unambiguous on its face, and that the parol evidence rule therefore

operated to exclude extrinsic evidence to vary the contract. Regarding the possibility of mistake, the

court stated, 

[o]f course plaintiff contends that there was no mistake. Therefore, evidence

showing that the refinanced amount 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 amend their

answer to include the affirmative defenses of misrepresentation and fraudulent inducement. 

The cause was heard by a jury in June of 2001. The jury awarded Textron damages of

$68,330, reducing the amount demanded by Textron based upon proof that Textron had failed to

entirely mitigate its damages. Textron was also awarded $22,000 in attorney’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, an additur, were denied. Appeal to this Court ensued. 

Issues

The issues raised by the Powells for our review, as we perceive them are:

I. Whether the trial court erred in its application of the parol evidence rule

when it excluded evidence regarding the amount due on the 1995 note and

evidence of how Textron disbursed $156,427.54 of proceeds from the 1997 note

to itself. 
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II. Whether the trial court erred in denying Powells’ request to amend their

answer to include the defense of fraudulent inducement.

Textron raises the additional issue of whether the trial court erred in denying its amended

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 are issues of law. Our review of the trial

court’s conclusions of law in a jury trial is de novo upon the record, with no presumption of

correctness. Tenn. R. App. P. 13(d); Campbell v. Florida Steel Corp., 919 S.W.2d 26, 28 (Tenn.

1996).

Denial of the Powells’ Motion to Amend Their Answer

We first address the issue of whether the trial court erred when it refused the Powells’

motion to amend their answer to include a defense of fraudulent inducement. The Tennessee

Rules of Civil Procedure provide:

A party may amend the party’s pleadings once as a matter of course at any

time before a responsive pleading is served or, if the pleading is one to which no

responsive pleading is permitted and the action has not been set for trial, the party

may so amend it at any time within 15 days after it is served. Otherwise a party

may amend the party’s pleadings 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. Wylie, 645 S.W.2d 247, 250 (Tenn. Ct. App. 1982). Factors which would

justify a refusal by the trial court to permit an amendment include bad faith; an undue delay in

filing; lack of notice or undue prejudice to the opposing party; repeated failure to cure

deficiencies by previous amendments; futility of the amendment. Id. Rule 15.01 is premised on

the fact that pleadings function primarily as a notice mechanism. Id. Accordingly, if leave to

amend is granted close to the trial date, the court must grant a continuance in order to allow the

opposing party sufficient time to address the new issue. Id.

In the present case, the Powells sought leave to amend their answer to include a defense

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 or
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Powells’ oral motion to amend made at the beginning of trial requested leave to add the defenses of mutual

mistake, misrepresentation, and fraudulent inducement. In denying the motion, the trial court stated, “I think you already

– if I recall, your answer, you already alleged mutual mistake.” Counsel for Powells responded, “Okay. But also I think

fraud or misrepresentation need to be added to that just out of precaution.” The answer did not include a defense of

mistake however, although the court initially operated under the belief that it did. Any error which might have resulted

from this belief was avoided, however, as the court subsequently specifically granted leave to amend to include the

defense of mistake. The court stated, “Well, I think I’ll allow you to amend to include it [mutual mistake].” 

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misrepresentation.1

 The court observed that if leave were granted to add fraud and

misrepresentation, the lawsuit would be so broadened as to necessitate a trial continuance. 

Counsel for the Powells stated, “I don’t think anybody wants a continuance. We want to get on

with this thing. . . . If [your Honor is] telling me that you would only grant [the motion to

amend] along with a continuance of this trial, then I will withdraw it.” 

We agree with the court below that had leave to amend been granted on the morning of

trial to permit the Powells to add a defense of fraudulent inducement or misrepresentation, justice

would have required a continuance of the trial. The record reflects that the Powells withdrew

their motion to amend to include misrepresentation or fraudulent inducement in order to avoid a

continuance. The Powells’ assignment of error on this issue is therefore without merit. We

accordingly affirm on this issue. 

Exclusion of Evidence Based on the Parol Evidence 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 previously 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 parties were mistaken, however, regarding the balance due on the 1995 note. They allege

Textron had indicated that they would review the records regarding payment of the 1995 note and

make an adjustment if necessary. The Powells further submit that during the course of discovery

Textron refused to provide information regarding the principal amount due from SBT, and that it

was only after examining the records of Royal Transportation, which had gone into bankruptcy,

that they discovered that the balance due was in fact $80,000. The Powells contend that the

indebtedness for the equipment had therefore already been paid, and that the $156,427.54 transfer

from Textron to itself to close out the 1995 note resulted in an overpayment of the amount due. 

The Powells’ argument on appeal, as we perceive it, is that it was error for the trial court 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 indebtedness actually due on

the equipment.

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
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[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 generally. 

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, transferred to Trailer Lease. The trial court

declined to grant the motion as to misrepresentation and fraudulent inducement without 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 defense accordingly is not waived.

Textron further argues that the lawsuit pertains only to the 1997 note, and that the 1995

note is a completely distinct transaction between separate parties. It argues that the 1997 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 proceeds 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 we perceive it, is that evidence of the amount due

on the 1995 note is extrinsic to the 1997 agreement, and that the 1997 agreement must be

enforced as written because its terms are clear and unambiguous. Powells’ argument, 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 that proof of the amount

due on the 1995 note is admissible to show a mistake regarding the amount actually due Textron

for the equipment. The trial court excluded evidence of the 1995 note and how the $156,427.54

was disbursed from Textron to itself based on the parol evidence rule. After examining Powells’

offer of proof, the court stated found no evidence that Textron made a mistake regarding the

amount due. 

A guaranty in a commercial transaction will be construed as strongly against 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 guarantee by the

Powells, we find their terms unambiguous, and extrinsic evidence is not admissible to explain or

vary those terms. Id. at 804. However, in the present action, the Powells seek not to explain or

modify the unambiguous terms of the written agreement with Textron. They do not submit that

the agreed upon terms or obligations under the contract were other than those which appear on

the face of the documents. Rather, Powells argue that the distribution of $156,427.54 by Textron

to itself was intended to pay off the 1995 note, and that this amount reflects a mistake regarding

the amount actually due on the 1995 note. 

The parol evidence rule serves to secure the integrity of contracts and to guard against

fraud by a party who agrees to the unambiguous terms of a written agreement and then seeks to
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disavow those terms through extrinsic evidence. 32A C.J.S. Evidence § 1132, § 1159 (1996);

see Tidwell v. Morgan Bldg. Sys., Inc., 840 S.W.2d 373, 376 (Tenn. Ct. App. 1992). 

Accordingly, the courts have refused to permit alteration of unambiguous contractual terms

through the use of extrinsic or parol (oral) evidence. Id. The rule encompasses contracts of

guaranty. 32A C.J.S. Evidence § 1165 (1996). However, application of the parol evidence 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 from 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 contract as written, therefore, is not an expression of the parties’

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 869, 877 (Tenn. Ct. App. 1972); Rentenbach

Eng’g Co. v. General Realty, Ltd., 707 S.W.2d 524, 527 (Tenn. Ct. App. 1985); Decatur

County Bank v. Duck, 926 S.W.2d 393, 397 (Tenn. Ct. App. 1997). Thus the rule has been

considerably relaxed by the courts “in order that fraud may be thwarted, mistakes corrected,

accidents relieved against, trusts set up and enforced, and usury exposed and eliminated.” 

Gibson’s Suits in Chancery, § 189 (William H. Inman ed., 6th ed. 1982).

In this case, the disbursement sheet is silent as to how Textron disbursed over $156,000

of proceeds to itself. Textron acknowledges, however, that the purpose of the disbursement was

to “close out” the 1995 note. Thus the essence of the agreement was that Trailer Lease 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 advance. It is undisputed that the

1997 note did not serve to finance additional equipment other than that transferred from Royal

Transport. Proof introduced to show that the amount due on the 1995 note was in fact $80,000

would serve not to vary the contract, but to show mistake regarding the amount of indebtedness

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 court on this issue is therefore reversed. We remand for a new trial.

Conclusion

We affirm the decision of the trial court denying the Powells leave to amend their answer

on the morning of trial to include the affirmative defenses of misrepresentation or fraudulent

inducement. Judgment of the trial court excluding evidence of the 1995 note executed by

Textron and SBT and evidence of how $156,427.54 in proceeds from the 1997 note were

disbursed by Textron to itself is reversed. This cause is remanded for a new trial consistent with

this opinion. In light of the foregoing, Textron’s assignment of error regarding the trial court’s 
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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