IN THE COURT OF APPEALS OF TENNESSEE

AT JACKSON

July 19, 2011 Session

SECURAMERICA BUSINESS CREDIT 

 v. 

KARL SCHLEDWITZ and TERRY LYNCH

Direct Appeal from the Circuit Court for Shelby County

No. CT-001803-07 Donna M. Fields, Judge

No. W2009-02571-COA-R3-CV - Filed August 26, 2011

This is a guaranty case. Appellants personally guaranteed a line of credit for their trucking

company. Later, Appellants sold the trucking company to two employees, but were not

released by the Appellee lender from their guaranties. Under new ownership, the company

falsified borrowing documents so that more money was extended on the line of credit than

was collateralized per the loan agreement. This was done with the complicity of the lender,

but without the knowledge of the guarantors. The debtor trucking company defaulted, and

the lender sought repayment of the loan from the guarantors. Following a bench trial, the

trial court found Appellants liable for their personal guaranties, but denied prejudgment

interest and punitive damages due to what the court characterized as the fraudulent actions

of Appellee. In an apparent clerical mistake, on the same date that the trial court entered its

final judgment, it also entered an order voluntarily dismissing all claims against Appellants.

More than a year later, the trial court entered an order clarifying its prior order of dismissal.

After a thorough review of the record, we conclude that: (1) the trial court properly afforded

Appellee relief under Tenn. R. Civ. P. 60.01 to clarify its prior order of dismissal; and (2) the

trial court made incomplete and contradictory findings of fact and conclusions of law, such

that further appellate review is precluded. Consequently, we vacate and remand for

additional findings.

Tenn. R. App. P. 3. Appeal as of Right; Judgment of the Chancery Court Vacated

and Remanded

J. STEVEN STAFFORD,J., delivered the opinion of the Court, in which ALAN E. HIGHERS, P.J.,

W.S., and DAVID R. FARMER, J., joined.

David J. Cocke, Memphis, Tennessee, for the appellants, Karl Schledwitz and Terry Lynch.
W.O. Luckett, Jr., Clarksdale, MS, and Lorrie K. Ridder, Memphis, Tennessee, for the

appellee, SecurAmerica Business Credit.

Webb A. Brewer and Steven E. Barlow, Memphis, TN, for the Amicus Curiae, Tennessee

Citizen Action Alliance, Inc.

Frank S. Cantrell, Bruce C. Harris, and Craig P. Barnes, Memphis, TN, for the Amicus

Curiae, Memphis Area Legal Services, Inc.

OPINION

I. Background Facts

1

Appellee SecurAmerica Business Credit (“SecurAmerica”) brought this action on

March 27, 2001, against Southland Transportation Co., LLC (“Southland Transportation”),

Southland Capital Co. (“Southland Capital”), and Appellants 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 Appellants, 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 BIDCO Act, see Tenn. Code Ann. § 45-8-201 et

2

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.

We cull these facts from the trial court’s findings, the briefs, and the appellate record. Given our 1

decision herein that the trial court’s findings were incomplete, we present these facts for narrative purposes

only.

BIDCO is an acronym for a “business and industrial development corporation.” Tenn. Code Ann. 2

§ 45-8-203(4).

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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. Based upon the amount listed on the borrowing

3

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, monies would 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.

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 Collateralstated 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 Appellants,

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 were identical in substance, and provided, in relevant part, as follows:

The Guarantor hereby (a) unconditionally and irrevocably

guarantees the punctual payment and performance when due

(whether at stated maturity, by acceleration or otherwise) of all

Eligible accounts were generally defined by theCredit Agreement to be accounts arising out of sales 3

in the ordinary course of business that were not more than ninety days old.

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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.

The Credit Agreement provided that advances were not to exceed the lesser of (1)

$1.5 million; or (2) 85% of eligible accounts receivable. Two months after its inception, in

November 1999, the loan was fully funded (i.e., at its maximum loan balance of $1.5

million), and more or less remained that way while Southland Transportation was in

existence. A field examination performed by SecurAmerica in June 2000 revealed that the

eligible accounts receivable were sufficient to cover the advances and to protect

SecurAmerica in the event of default.

4

However, this is not to say that Southland Transportation was a profitable business.

The company faced significant cash flow problems, and Southland Capital repeatedly infused

money into the business. With a struggling business on their hands, Appellants explored

opportunities to sell the trucking operation. In August 2000, Appellants sold Southland

Transportation to two of its employees – Michael Harrell and Michael Lucchesi. Messrs.

5

Harrell and Lucchesi did not pay a cash purchase price for their respective interests. Rather,

the transaction was structured so that Appellants retained certain debts of Southland

Transportation, and Messrs. Harrell and Lucchesi obligated themselves on a promissory note

payable to Appellants. Messrs. Harrell and Lucchesi envisioned a leaner operation with less

6

debt, and all four gentlemen apparently believed that the trucking company could be a viable

business going forward.

This change in ownership constituted an event of default under the Credit Agreement.

However, SecurAmerica did not accelerate the loan, nor did it release Appellants from their

personal guaranties. Rather, after the sale, SecurAmerica continued to lend money to

Southland Transportation under the Credit Agreement, and Appellants remained as

guarantors. Notwithstanding the restructuring, or perhaps because of it, Southland

Transportation continued its descent into unprofitability. Soon after the sale, thirty to forty

truck drivers left, striking a blow to the company’s revenue stream. Messrs. Harrell and

SecurAmerica generally conducted field examinations of Southland Transportation on a quarterly 4

basis. It did not perform a field examination in September or December 2000.

The sale was effective August 1, 2000; however, some of the closing documents were not signed 5

until September 2000.

SecurAmerica contended at trial that this purported sale was, in fact, a “gift” of a failing business 6

in order for Appellants to avoid liability on their guaranties. The trial court determined that it was a sale.

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Lucchesi were likewise unsuccessful in their efforts to bring other investors on board.

Sometime between August 2000 and February 2001, Southland Transportation began

falsifying the borrowing base certificates that it submitted on a daily basis in order to acquire

additional fundsfrom SecurAmerica. These borrowing base certificates were falsely inflated

to make it appear that Southland Transportation had a higher eligible accounts receivable

balance than it actually did, which consequently allowed it to obtain advances from

SecurAmerica in excess of that provided by the Credit Agreement. Essentially, this created

an out of balance debt-to-collateral ratio because monies were advanced on the basis of

accounts receivable that did not exist. For example, in August 2000, $815,000 was collected

from accounts receivable and put in the blocked account to pay down the loan. That amount

fell to $604,000 in September; $414,000 in October; $187,000 in November; and $24,000

in December. Thus, Southland Transportation’s actual accounts receivable balance was

dropping precipitously; however, all the while, the line of credit remained at its maximum

balance of approximately $1.5 million.

7

The genesis of the false borrowing base certificates is sharply contested. Mr. Harrell

testified that the falsifying began in August 2000 at the suggestion of SecurAmerica’s

President, Mr. Randall Reagan. Mr. Reagan testified that he was unaware of this practice

until December 2000, and that he virtually ceased lending to Southland Transportation after

he discovered that Mr. Harrell was falsifying the certificates. However, it is uncontroverted

that, for some period of time, both Mr. Harrell and Mr. Reagan were aware that the

borrowing base certificates had been falsified; nevertheless, SecurAmerica continued to

make advances. In addition to the falsified borrowing base certificates, Mr. Harrell, with the

knowledge and complicity of Mr. Reagan, began diverting accounts receivable remittances

around the blocked account. Now, instead of being used to pay down the line of credit, as

required by the terms of the Credit Agreement, this money was diverted to fund the day-today operations of Southland Transportation.

Mr. Reagan’s complicity in the falsified borrowing base certificates apparently

stemmed from his belief that continuing to lend operating capital to Southland Transportation

was the best option to prevent the company from failing and defaulting on its loan. At the

same time that the Southland Transportation loan was failing, SecurAmerica had several

other “problem” loans in its portfolio. In fact, SecurAmerica had been placed in default by

its own lender, TransAmerica. Consequently, Southland Transportation’s eventual ability

to pay off its debts was pivotal to SecurAmerica’s ability to pay off its own debts.

The collections in January and February 2001 were approximately $69,000 and $50,000, 7

respectively. The loan balance more or less remained at its maximum during these months as well.

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Despite his knowledge that the Southland Transportation loan was failing and was

now based on falsified documentation, Mr. Reagan did not inform anyone, particularly the

Appellants or SecurAmerica’s board of directors, of the dire situation. After selling

Southland Transportation in August 2000, Appellants were unaware that money was being

loaned based on false borrowing base certificates or that money was being diverted around

the blocked account. Appellants had retained the right to inspect the books and records of

Southland Transportation when they sold the business to Messrs. Harrell and Lucchesi.

However, Appellants had not exercised thisright and so remained uninformed asto the plight

of the trucking company. Meanwhile, Southland Transportation continued to struggle. After

losing its biggest customer in February 2001, Southland Transportation ceased doing

business, thereby defaulting on the Credit Agreement.

In March 2001, Mr. Reagan revealed the fate of Southland Transportation to

SecurAmerica’s board of directors. After the board of directors learned of his actions, he

was promptly fired. SecurAmerica accelerated the debt ($1,485,564.45 plus accrued interest

8

according to SecurAmerica’s records). Because Southland Transportation had insufficient

assets to satisfy the loan balance, SecurAmerica sought repayment from Appellants under

their personal guaranties. After learning of the actions of Mr. Harrell and Mr. Reagan,

Appellants declined to honor their guaranties.

2. Procedural History

On March 27, 2001, SecurAmerica filed its complaint in the Shelby County Chancery

Court against Southland Transportation, Mr. Schledwitz, Mr. Lynch, Mr. Lucchesi, and Mr.

Harrell. Essentially, the complaint sought a judgment against Southland Transportation on

the promissory note, against all of the defendants for fraud in connection with the falsified

borrowing base certificates, against Mr. Schledwitz individually on the Guarantee of Validity

of Collateral, and against Mr. Schledwitz and Mr. Lynch on their personal guaranties.

On May 17, 2001, Appellants Schledwitz and Lynch filed their answer and asserted

the affirmative defense of fraud by SecurAmerica. See Tenn. R. Civ. P. 8.03. Appellants

also asserted, inter alia, that SecurAmerica had: (1) breached the implied covenant of good

faith and fair dealing; (2) failed to preserve its collateral; and (3) significantly increased the

risk of nonpayment by Southland Transportation. Appellants also filed a cross-claim alleging

conspiracy and fraud against Southland Transportation and Mr. Reagan, in both his

individual and corporate capacities.

Mr. Reagan later entered into a settlement agreement with SecurAmerica in which he forfeited his 8

retirement account, worth approximately $540,000, in exchange for SecurAmerica’s covenant not to sue.

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On January 21, 2004, SecurAmerica amended its complaint to allege new claims

against Southland Transportation for breach of contract, and against Southland Capital for

tortious interference with contract. SecurAmerica sought a constructive trust for the alleged

breach of the Subordination Agreement. SecurAmerica also added claims against Appellants

and their wives, Gail Schledwitz and Robyn Lynch, for fraudulent conveyance. On April

9

12, 2004, Appellants filed their second amended answer to raise additional affirmative

defenses and to amend their counterclaim against SecurAmerica and their cross-claim against

Mr. Reagan and Southland Transportation to allege violations of the Tennessee Consumer

Protection Act. Myriad amended pleadings, motions, and responses followed.

All claims by all the parties against defendants Harrell, Lucchesi, and Reagan were

eventually voluntarily dismissed. The trial court bifurcated the fraudulent conveyance claims

against Appellants and their wives, and proceeded to try all other claims at a bench trial held

January 7 – 15, 2008.

More than a year later, on January 30, 2009, the trial court entered its findings of fact

and conclusions of law. Therein, judgment was rendered in favor of SecurAmerica against

Appellants on their personal guaranties for $500,000 each. The trial court declined to award

pre-judgment interest due to its finding that Mr. Reagan and SecurAmerica had committed

fraud. The trial court dismissed SecurAmerica’s claims on the Guaranty of Validity of

Collateral signed by Mr. Schledwitz, and on the Subordination Agreement against Southland

Capital, and declined to award SecurAmerica punitive damages. The court also dismissed

Appellants’ claims under the Tennessee Consumer Protection Act.

On March 2, 2009, Appellants filed a motion to alter or amend the judgment. On July

17, 2009, Defendants Gail Schledwitz and Robin Lynch moved for summary judgment on

SecurAmerica’s fraudulent conveyance claims against them, which had previously been

bifurcated and were not yet resolved. On November 20, 2009, the trial court denied

Appellants’ motion to alter or amend, awarded SecurAmerica $125,000 in attorney’s fees

against each Appellant, and entered its final amended judgment, which specifically

incorporated its earlier findings of fact and conclusions of law from January 30, 2009.

On the same day that the trial court entered its final amended judgment, November

20, 2009, it also entered an order granting SecurAmerica a voluntary nonsuit “as to

Defendants Karl Schledwitz, Gail Schledwitz, Terry Lynch, and Robin Lynch.”

Appellants timely filed their notice of appeal on December 4, 2009. Upon reviewing

SecurAmerica asserted that Appellants had fraudulently transferred certain assets to their wives in 9

an attempt to shelter those assets from judgment.

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the appellate record, this Court ascertained that the trial court’s orders of November 20,

2009, appeared contradictory. Specifically, it appeared that SecurAmerica had voluntarily

nonsuited all of its claims against Appellants on the same day that a final judgment was

entered granting relief on certain of those same claims. On January 5, 2011, we entered an

order directing the parties to clarify these seemingly incompatible rulings. Oral argument

was held on January 25, 2009, and the matter was argued by counsel. Thereafter, on January

28, 2009, SecurAmerica filed a motion styled “Appellee SecurAmerica’s Motion Pursuant

to Rule 60.01 for Leave to Seek Correction of November 20, 2009 Orders by Trial Court.”

By order of February 15, 2011, we remanded the matter to the trial court “for the limited

purpose of permitting Appellee relief regarding the ‘Order Granting Voluntary Nonsuit.’”

Following remand, SecurAmerica filed a motion in the trial court seeking correction of the

“Order Granting Voluntary Nonsuit.” The trial court then entered an order pursuant to Tenn.

R. Civ. P. 60.01 styled, “Order Clarifying and Correcting November 20, 2009 Order of

Voluntary Nonsuit as to the Fraudulent Conveyance Claims Only.” (Emphasis added).

Therein, the trial court stated that:

The Court hereby clarifies the November 20, 2009 Order of

Voluntary Nonsuit by stating that said Order dismissed only the

fraudulent conveyance claims, as those were the only claims

then pending before the Court. Neither the Plaintiff,

SecurAmerica, nor this Court intended to dismiss the entire case

by entering the Order of Voluntary Nonsuit.

On March 16, 2011, Appellants filed a second notice of appeal. By order of April 7,

2011, we consolidated Appellants’ appeals and directed the parties to file a supplemental

brief regarding the trial court’s clarifying order. The issue having been briefed, this case is

now properly before this Court.

3. Issues Presented

Appellants request that we review the following issues, as restated from their brief:

(1) Whether SecurAmerica’s fraudulent conduct abrogates

Appellants’ guaranties?

(2) Whether Appellants’ satisfied their burden of proof for

damages they incurred as a result of SecurAmerica’s fraud?

(3) Whether Appellants had a duty to monitor the subject loan

and, if so, what was the extent of that duty?

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(4) Whether SecurAmerica’s fraudulent conduct constituted a

violation of the Tennessee Consumer Protection Act?

Additionally, Appellee raises the following issues, as restated from its brief :

10

(5) Whether the trial court erred in finding for SecurAmerica on

Appellants’ personal guaranties and not on Mr. Schledwitz’s

Guaranty of Validity of Collateral?

(6) Whether the trial court erred in declining to award

prejudgment interest?

(7) Whether the trial court erred in finding that SecurAmerica

ratified the actions of Mr. Reagan?

(8) Whether the trial court erred in finding that the actions of

SecurAmerica, through Mr. Reagan, constituted fraud?

We note that the amicus briefs raise several issues related to the trial court’s denial

of Appellants’ claims under the Tennessee Consumer Protection Act. However, for the

reasons stated fully below, we are unable to conduct judicial review on the record presented

to us. Consequently, we do not reach the issues raised by either the parties or the amici

curiae.

4. Analysis

A. Standard of Review

This matter was tried without a jury. Consequently, we review the trial court’s

findings of fact de novo with a presumption of correctness, unlessthe evidence preponderates

otherwise. Tenn. R. App. P. 13(d). No presumption of correctness, however, attaches to the

trial court’s conclusions of law and our review is de novo. Bowden v. Ward, 27 S.W.3d 913,

916 (Tenn. 2000). For the evidence to preponderate against a trial court's finding of fact, it

must support another finding of fact with greater convincing effect. Walker v. Sidney

Gilreath & Assocs., 40 S.W.3d 66, 71 (Tenn. Ct. App. 2000); The Realty Shop, Inc. v. R.R.

Westminster Holding, Inc., 7 S.W.3d 581, 596 (Tenn. Ct. App. 1999). When the resolution

of the issues in a case depends upon the truthfulness of witnesses, the trial judge who has the

opportunity to observe the manner and demeanor of the witnesses while testifying is in a far

We have intentionally omitted certain issues presented by Appellee that we find duplicative. 10

-9-
better position than this Court to decide those issues. See McCaleb v. Saturn Corp., 910

S.W.2d 412, 415 (Tenn. 1995); Whitaker v. Whitaker, 957 S.W.2d 834, 837 (Tenn. Ct. App.

1997). “If the trial court’s factual determinations are based on its assessment of witness

credibility, this Court will not reevaluate that assessment absent clear and convincing

evidence to the contrary.” Heffington v. Heffington, No. M2009-00434-COA-R3-CV, 2010

WL 623629, at *2 (Tenn. Ct. App. Feb. 19, 2010) (citing Jones v. Garrett, 92 S.W.3d, 835,

838 (Tenn. 2002)).

B. Order of Nonsuit and Clarifying Order

We are first compelled to discuss the trial court’s orders of November 20, 2009, in

which it simultaneously rendered final judgment in favor of SecurAmerica on Appellants’

personal guaranties and granted a voluntary nonsuit of all claims against Appellants. As

noted above, on remand, the trial court entered a clarifying order correcting its order of

nonsuit pursuant to Tenn. R. Civ. P. 60.01. Therein, the trial court indicated that its intent

11

was to grant a nonsuit as to the pending fraudulent conveyance claims only and not as to all

claims against Appellants.

Appellants contend that SecurAmerica was not entitled to relief under Rule 60.01

because that rule addresses itself to clerical errors of the court and not to mistakes of counsel.

According to Appellants, the filing of a voluntary “nonsuit is in the hands of the plaintiff, and

the judge has no discretion with regard to the form of the order.” Appellants urge that

SecurAmerica’s relief should have been sought under Tenn. R. Civ. P. 60.02 because the

order of nonsuit reflected a drafting error by SecurAmerica’s counsel. Rule 60.02 contains

12

a one-year time period for correcting such mistakes; consequently, Appellants urge that

Tenn. R. Civ. P. 60.01 provides, as follows: 11

Clerical mistakes in judgments, orders or other parts of the record, and errors therein arising from

oversight or omissions, may be corrected by the court at any time on its own initiative or on motion

of any party and after such notice, if any, as the court orders. During the pendency of an appeal, such

mistakes may be so corrected before the appeal is docketed in the appellate court, and thereafter

while the appeal is pending may be so corrected with leave of the appellate court.

Tenn. R. Civ. P. 60.02 provides, in relevant part, as follows: 12

On motion and upon such terms as are just, the court may relieve a party or the party’s legal

representative from a final judgment, order or proceeding for the following reasons: (1) mistake,

inadvertence, surprise or excusable neglect . . . . The motion shall be made within a reasonable time,

and . . . . not more than one year after the judgment, order or proceeding was entered or taken.

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SecurAmerica irretrievably nonsuited all of its claims because more than a year had passed

since the order of nonsuit was entered. We disagree.

Voluntary dismissal of a cause of action is governed by Tenn. R. Civ. P. 41.01. In

13

interpreting Rule 41.01, our Supreme Court has held that, in non-jury cases, the plaintiff has

the right to take a voluntary dismissal “until the matter has been finally submitted to the trial

judge for decision.” Weedman v. Searcy, 781 S.W.2d 855, 857 (Tenn. 1989). However,

after the matter has been finally submitted to the trial court for a determination on the merits,

the plaintiff can no longer take a voluntary dismissal as a matter of right. Id.; see also

Hamilton v. Cook, No. 02A01-9712-CV-00324, 1998 WL 704528, at *4 (Tenn. Ct. App.

Oct. 12, 1998). Once the right to a voluntary nonsuit has been lost, however, the trial court

may still grant a dismissal upon the exercise of its sound discretion. See McCann Steel Co.

v. Carney, 237 S.W.2d 942, 944 (Tenn. 1951); Hamilton, 1998 WL 704528, at *5.

In the instant case, we note that a bench trial was held in January 2008, and the trial

court submitted its findings of fact and conclusions of law on January 30, 2009. While not

styled as a “judgment,” this order substantively decided the issues between the parties. In

response, Appellants filed a “Motion to Alter or Amend Judgment” on March 3, 2009. When

the trial court entered its “Final Amended Judgment,” on November 20, 2009, it specifically

referred to its earlier findings of fact and conclusions of law as having had the effect of a

judgment and incorporated its findings therein.

In short, at the time SecurAmerica was purported to have taken a voluntary nonsuit,

the matter had been finally submitted to the trial court, and, in fact, had already been decided.

The trial court had rendered its decision on the parties’ substantive claims in its findings of

fact and conclusions of law, and the decision could only be altered upon the discretion of the

trial court. Thus, SecurAmerica could not have taken a nonsuit without the trial court

invoking its discretion to permit such a nonsuit. Appellants argue that the trial court played

Tenn. R. Civ. P. 41.01 provides, in relevant part, as follows: 13

(1) Subject to the provisions of Rule 23.05, Rule 23.06, or Rule 66 or of any statute, and except

when a motion for summary judgment made by an adverse party is pending, the plaintiff shall have

the right to take a voluntary nonsuit to dismiss an action without prejudice by filing a written notice

of dismissal at any time before the trial of a cause and serving a copy of the notice upon all parties,

and if a party has not already been served with a summons and complaint, the plaintiff shall also

serve a copy of the complaint on that party; or by an oral notice of dismissal made in open court

during the trial of a cause; or in jury trials at any time before the jury retires to consider its verdict

and prior to the ruling of the court sustaining a motion for a directed verdict. If a counterclaim has

been pleaded by a defendant prior to the service upon the defendant of plaintiff's motion to dismiss,

the defendant may elect to proceed on such counterclaim in the capacity of a plaintiff.

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no role in the order of nonsuit and that the mistake was attributable to the inadvertence of

SecurAmerica’s counsel. However, such an argument overlooks the fact that SecurAmerica

did not have an unfettered right to take a nonsuit at that time. Rather, it could do so only

with the trial court’s permission. For this reason, Tenn. R. Civ. P. 60.01 was the appropriate

rule for the trial court to use in order to clarify its intent as to its nonsuit order of November

20, 2009.

Tenn. R. Civ. P. 60.01 “empowers trial courts . . . to correct ‘errors [in judgments] .

. . arising from oversight or omissions . . . .’” Spann v. Abraham, 36 S.W.3d 452, 461-62

(Tenn. Ct. App. 1999) (quoting Tenn. R. Civ. P. 60.01). We review a trial court’s decision

whether to grant a Rule 60.01 motion under an abuse of discretion standard. Anderson v.

Anderson, No. M2004-01570-COA-R3-CV, 2006 WL 1627181, at *6 (Tenn. Ct. App. June

9, 2006). Our Supreme Court has stated that “[u]nder the abuse of discretion standard, a trial

court's ruling ‘will be upheld so long as reasonable minds can disagree as to propriety of the

decision made.’” Eldridge v. Eldridge, 42 S.W.3d 82, 85 (Tenn. 2001) (quoting State v.

Scott, 33 S.W.3d 746, 752 (Tenn. 2000); State v. Gilliland, 22 S.W.3d 266, 273 (Tenn.

2000)). This standard does not permit the appellate court to substitute its judgment for that

of the trial court. Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998). Rather, an

abuse of discretion occurs only when the trial court “‘applies an incorrect legal standard, or

reaches a decision which is against logic or reasoning that causes an injustice to the party

complaining.’” Eldridge, 42 S.W.3d at 85 (quoting State v. Shirley, 6 S .W.3d 243, 247

(Tenn.1999)).

Upon review, we conclude that the trial court did not abuse its discretion in providing

SecurAmerica Rule 60.01 relief for the following reasons. First, under the circumstances,

it is nonsensical that SecurAmerica would nonsuit a million-dollar judgment on the same day

the judgment was rendered. Second, the fraudulent conveyance claims, which had been

previously bifurcated, were the only claims still pending, so they were logically the only

claims that could be voluntarily dismissed. Third, there was a pending summary judgment

motion on the fraudulent conveyance claims, filed by Defendants Gail Schledwitz and Robyn

Lynch, that was set to be heard on November 20, 2009 (which explains why the claims would

be dismissed on that particular day). Fourth, Appellants appealed to this Court from the final

judgment of the trial court. If Appellants understood the order of nonsuit as dismissing all

claims against them, there would be nothing left for them to appeal. It appears that all

involved, including the trial court, understood that the order of nonsuit applied only to the

fraudulent conveyance claims. Under these admittedly bizarre facts, we conclude that the

trial court did not err in granting SecurAmerica relief pursuant to Rule 60.01 to clarify its

earlier order of nonsuit.

C. Fraud, Good Faith, and the Trial Court’s Findings

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A guaranty is a contract and is to be construed according to the ordinary meaning of

the language used and with the view to carry out the intent of the parties. First Nat’l Bank

v. Foster, 451 S.W.2d 434, 436 (Tenn. Ct. App. 1969). Guaranties are considered special

contracts under Tennessee law. SunTrust Bank v. Dorrough, 59 S.W.3d 153, 156 (Tenn.

Ct. App. 2001). Guarantors are disfavored in Tennessee, and we will construe a guaranty

against the guarantor as strongly as the language will permit. Id. (citing Squibb v. Smith,

948 S.W.2d 752, 755 (Tenn. Ct. App. 1997); Farmers–Peoples Bank v. Clemmer, 519

S.W.2d 801, 805 (Tenn. 1975)).

Appellants do not raise any issue concerning either the origination or execution of the

personal guaranties in question. We believe it is a fair summary of Appellants’ varied

arguments to say that, but for the alleged concerted actions of the debtor and the lender in the

performance of the underlying Credit Agreement, Appellants concede their liability under

the guaranties. Rather, Appellants contend that SecurAmerica, through the actions of its

President Mr. Reagan, inter alia, committed conspiracy and fraud, violated the implied

covenant of good faith and fair dealing, impaired the collateral securing the debt, and

dissipated assets; and that these actions relieve Appellants of liability on their guaranties.

SecurAmerica, on the other hand, essentially argues that the language of the guaranties

governs all dealings between the parties, that the actions of Mr. Reagan were authorized by

the Credit Agreement or were instances of poor business judgment, and that any fraud which

Mr. Reagan may have committed cannot be imputed to SecurAmerica.

After a bench trial spanning two weeks, the trial court issued its thirty-three page

findings of fact and conclusions of law. Therein, the trial court repeatedly characterized the

actions of Southland Transportation (through Mr. Harrell) and SecurAmerica (through Mr.

Reagan) as being fraudulent. The trial court reasoned that it would be inequitable to “avoid

the original guarant[ies],” which Appellants “entered into fully aware and accepting of the

requirements,” but that it would be likewise inequitable “to hold the Guarantors to an

alteration of the contract based upon the fraudulent actions of the Lender.” After applying

equitable principles, the trial court held Appellants liable for the full amount of their personal

guaranties, $500,000 each, but denied prejudgment interest “because of the fraud on the part

of Randall Reagan and SecurAmerica,” and further denied punitive damages or any judgment

over the amount of the guaranties.

We have conducted a painstaking review of the record, and of the trial court’s

judgment, and conclude that judicial review is precluded by incomplete and contradictory

findings by the trial court. Specifically, the trial court made incomplete and contradictory

findings on the issue of fraud by SecurAmerica. The trial court also neglected to address

Appellants’ defense that SecurAmerica violated the implied covenant of good faith and fair

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dealing. As discussed below, these findings are foundational to appellate review of this case,

and without them we cannot adjudicate these issues.

i. Fraud

It is well settled in Tennessee that the courts of our State will not be used to enforce

a contract which is the product of fraud; indeed, fraud vitiates all that it touches. Shelby

Elec. Co. v. Forbes, 205 S.W.3d 448, 455 (Tenn. Ct. App. 2005); see also New York Life

Ins. Co. v. Nashville Trust Co., 200 Tenn. 513, 292 S.W.2d 749, 754 (1956). Fraud arranged

between a creditor and a debtor can thus affect a guarantor’s obligation. In Transouth

Mortgage Corp. v. Keith, 1985 WL 4677 (Tenn. Ct. App. Dec. 24. 1985), this Court

reviewed a judgment based upon a guaranty. The defendant in Transouth executed a

personal guaranty in favor of the plaintiff bank guaranteeing an auto dealer’s debt. Id. at *1.

The auto dealer defaulted, and the bank sued the guarantor. Id. The guarantor

counterclaimed fraudulent concealment, alleging that the bank had a duty to inform the

guarantor of the debtor’s financial difficulties prior to the guaranty and “to notify the

defendant when the plaintiff knew or should have known that [the debtor] was floor planning

the same vehicle more than once, had sold some vehicles out of trust, and had written checks

that bounced.” Id. at *3. We stated:

[A]bsent a conspiracy which is not alleged, we hold that unless

the guaranty agreement provides otherwise, there is no duty on

the party to whom the guaranty is directed to notify the

guarantor of the business practices or financial difficulties of the

party whose performance is being guaranteed, whether such

practices occurred prior to the execution or during the term of

the guaranty and whether such activities were known or should

have been known by the party guaranteed. To hold otherwise

would make one party the de facto guardian of the other.

Certainly in business practices one is required to act fairly and

in good faith. See T.C.A. § 47-1-203. However, “fairly” does

14

not mean hold the other's hand, and guide and properly advise

him through the transaction. This is especially so when such

tender care is not requested and the pleadings do not reveal such

request. Absent a trust relationship or fraud, contracting parties

are charged with the duty of looking out for themselves.

Former section 47-1-203 was renumbered to section 47-1-304 by 2008 Pub. Acts, c. 930, § 1, 14

effective July 1, 2008.

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Transouth, 1985 WL 4677, at *3 (emphases added); see also Walker v. First State Bank,

849 S.W.2d 337, 342 (Tenn. Ct. App. 1992) (noting, in a case with similar facts and result,

that the guarantor had not plead that a conspiracy existed between the creditor and the

debtor).

From these cases, it is apparent that, where a conspiracy or fraud between the debtor

and the creditor is alleged, as is the case here, such fraudulent behavior may affect the

liability of the guarantor. The ultimate effect, however, is dependent upon a finding of fraud

or conspiracy in the first place. Here, while the trial court found that SecurAmerica and

Southland Transportation acted fraudulently, it did not make the specific and consistent

findings of fact necessary for this Court to review its determination.

15

First, the trial court determined that SecurAmerica was responsible for the actions of

its President, Mr. Reagan, because it ratified his actions. However, the court did not make

the necessary findings to explain its decision. We note that this issue did not appear to be

litigated at trial before the trial court decided the issue in its findings of fact and conclusions

of law. However, in doing so, the court did not make specific findings to support its

16

conclusion, and the supporting statements it did make were contradictory. For example, the

trial court states that, “SecurAmerica adopted and ratified the actions of Randall Reagan and

could not have given Schledwitz and Lynch notice because Randall Reagan was acting alone,

without input from the Board of Directors or any other officer in SecurAmerica.” Later, the

court states that SecurAmerica “has ratified the fraudulent acts” of Mr. Reagan because it

“adopt[ed] and advance[d]” his actions. The first statement appears contradictory, and the

second, vague and conclusory. Neither explanation provides a reviewing court with a

rationale for the trial court’s decision.

Next, no finding was made regarding when SecurAmerica’sfraudulent activity began.

In its findings of fact and conclusions of law, the trial court notes that Mr. Harrell testified

that the false borrowing base certificates were firstsubmitted at the suggestion of Mr. Reagan

sometime in the Fall of 2000, perhaps as early as August 2000. On the other hand, the trial

Appellants also asserted a claim for conspiracy against Mr. Reagan in his corporate capacity as 15

President of SecurAmerica. The trial court apparently did not rule on this claim.

SecurAmerica argued at trial that Mr. Reagan’s actions were within the scope of the powers granted 16

to him by the Credit Agreement. After the trial court’s finding that SecurAmerica ratified the actions of Mr.

Reagan, SecurAmerica now argues on appeal that Mr. Reagan was acting outside of the scope of his agency.

A party is not generally permitted to take one position at trial and a different position on appeal. See State

v. Harris, 839 S.W.2d 54, 65-66 (Tenn. 1992). However, given that we cannot discern the basis for the trial

court’s decision, we find it necessary to remand for further findings notwithstanding SecurAmerica’s

inconsistent positions. 

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court notes that Mr. Reagan testified that he did not know about the false certificates until

December 2000 or January 2001. At one point, the trial court indicates that the failure of

SecurAmerica to perform a regular quarterly field examination in September or December

2000, as well as the fact that Mr. Reagan no longer insisted on daily reports from Southland

Transportation, “lends credence to the testimony of Michael Harrell that the false reporting

began in August 2000.” However, the trial court never makes a specific finding of fact as

to when the fraudulent actions of SecurAmerica began. Without a finding as to when the

fraudulent activity began, we cannot begin to review the effect such fraudulent activity may

have had on the underlying debt, and, eventually, the guaranties. The findings of the trial

court indicate that, at the time of the sale of Southland Transportation, in August 2000, the

loan was fully collateralized with $1.7 million accounts receivable securing a loan balance

of approximately $1.5 million. At the time of default, the loan was still approximately at its

maximum balance; however, the accountsreceivable had eroded significantly. The trial court

found that neither party had proven the amount of liquidated accounts receivable, but

primarily attributed the erosion of collateral to the failure of the business. However, without

a finding of fact as to when the fraudulent activity began, we cannot know what effect it may

have had on the debt. Any decision on this issue by this Court would be pure speculation.

Finally, the trial court provided contradictory findingsregarding fraud. The trial court

correctly set out the elements of fraud, which are: “(1) an intentional misrepresentation of

an existing material fact, (2) knowledge of the representation’s falsity, and (3) injury caused

by reasonable reliance on the misrepresentation.” Lopez v. Taylor, 195 S.W.3d 627, 634

(Tenn. Ct. App. 2005) (citations omitted). The trial court then found that both Southland

Transportation and SecurAmerica (through Messrs. Harrell and Reagan, respectively)

committed fraud. However, at other times in its judgment, the trial court states that

Appellants never inquired as to the status of the loan, and thus could not have relied on any

misrepresentation. Likewise, the trial court notes, as mentioned above, that Appellants did

not prove their injury because they did not prove the balance of the liquidated accounts

receivable. Both of these findings negate the elements of fraud. If there was no

17

misrepresentation, and no injury, how can there be fraud? We cannot state an opinion as to

the existence of fraud for lack of sufficient findings, but note only that the findings that were

made are incomplete and contradictory.

ii. Implied Covenant of Good Faith and Fair Dealing

The trial court thus found that Appellants did not meet their burden of proof under Tenn. R. Civ. 17

P. 8.03. To this point, we note that Appellants asserted fraud as both an affirmative defense and as a cause

of action. From our review of the record, the trial court never ruled on the latter.

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Apart from fraud, Tennessee common law also imposes an implied covenant of good

faith and fair dealing in the performance of contracts. See Wallace v. Nat’l Bank of

Commerce, 938 S.W.2d 684, 686 (Tenn. 1996). This Court has stated that the purposes of

this implied duty are two-fold: to honor the reasonable expectations of the contracting

parties, and to protect the rights of the parties to receive the benefits of their agreement.

Goot v. Metro. Gov’t of Nashville & Davidson Cnty., No. M2003-02013-COA-R3-CV, 2005

WL 3031638, at *7 (Tenn. Ct. App. Nov. 9, 2005) (internal citations omitted). Thus, the

contours of this duty may vary according to the terms of the contract and the performance

rendered by the parties. Wallace, 938 S.W.2d at 686 (citing TSC Indus., Inc. v. Tomlin, 743

S.W.2d 169, 173 (Tenn. Ct. App. 1987); Covington v. Robinson, 723 S.W.2d 643, 645-46

(Tenn. Ct. App. 1986)). However, this implied duty does not “create new contractual rights

or obligations, nor can it be used to circumvent or alter the specific terms of the parties’

agreement.” Goot, 2005 WL 3031638, at *7 (internal footnotes and citations omitted).

The implied covenant of good faith and fair dealing binds parties to a contract “‘to act

in word and deed, in a responsible manner.’” Williams v. Maremont Corp., 776 S.W.2d 78,

81 (Tenn. Ct. App. 1988) (quoting Gibson’s Suits in Chancery, 6 Edition, § 34).

th

Furthermore, this duty proscribes actions which “intentionally or purposefully do anything

that would have the effect of ‘destroying or injuring the right of the other party to receive the

fruits of the contract.’” Dunn v. Matrix Exhibits, Inc., No. M2003-02725-COA-R3-CV,

2005 WL 2604048, at *3 (Tenn. Ct. App. Oct. 13, 2005) (quoting Winfree v. Educators

Credit Union, 900 S.W.2d 285, 289 (Tenn. Ct. App. 1995) (quoting 17 Am.Jur. 2d Contracts

§ 256 (1964)); see also Restatement (Second) of Contracts § 205 (1979).

Whether a party acted in good faith is a question of fact. Lamar Adver. Co. v. ByPass Partners, 313 S.W.3d 779, 791 (Tenn. Ct. App. 2009), perm. app. denied (Tenn. March

15, 2010). “[I]n determining whether the parties acted in good faith in the performance of

a contract, the court must judge the performance against the intent of the parties as

determined by a reasonable and fair construction of the language of the instrument.”

Wallace, 938 S.W.2d at 686 (citing Covington v. Robinson, 723 S.W.2d 643, 645-46 (Tenn.

Ct. App. 1986)). “[T]he common law duty of good faith does not extend beyond the agreed

upon terms of the contract and the reasonable contractual expectations of the parties.” Id. at

687 (citing Sheets v. Knight, 779 P.2d 1000 (1989)).

In the present case, although the issue was plainly litigated at trial, the trial court’s

judgment did not address Appellants’ affirmative defense that SecurAmerica violated the

implied covenant of good faith. A finding by the trial court that SecurAmerica breached the

duty of good faith may affect Appellants’ liability as guarantors. On the other hand, a finding

that SecurAmerica did not breach the duty of good faith would appear to contradict the trial

court’s finding that SecurAmerica acted fraudulently. Regardless, without a finding of fact

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by the trial court on the issue of good faith, this Court is left without a basis for review and

can only speculate as to the nature of the trial court’s judgment.

5. Conclusion

In the face of these inadequate and contradictory findingsregarding the issues of fraud

and the implied covenant of good faith and fair dealing, we are simply unable to conduct

meaningful judicial review. We sympathize with the trial court, which aptly noted that

“[f]raud and poor record keeping made this case so labyrinthine that it required the Court to

make a careful review of a tangled record full of allegations of multifarious behavior on the

part of all involved.” Unfortunately, this snarl of litigation has only been exacerbated on

appeal. A case of this factual complexity requires findings that are detailed, specific, and

18

logical. Furthermore, as the case involves cross-allegations of fraudulent behavior,

credibility determinations may be required. These tasks fall to the trial court, and until they

are completed, we cannot review the actions taken below.

Because the issues upon which we lack sufficient findings, (i.e., those relating to

allegations of fraud and the lack of good faith) are central to a complete review of this case,

it would be premature to address the other issues raised by the parties. Consequently, all

other issues are pretermitted at this time.

For the foregoing reasons, we vacate the decision of the Shelby County Chancery

Court and remand for further proceedings consistent with this Opinion. Costs of this appeal

are taxed one-half to Appellants, Karl Schledwitz and Terry Lynch, and theirsurety, and onehalf to Appellees, SecurAmerica Business Credit, for which execution may issue if

necessary.

_________________________________

J. STEVEN STAFFORD, JUDGE

The parties provided an appellate record that is both excessive and incomplete. The record is at 18

times superfluous(e.g., it unnecessarily contains: (1)full transcripts of the trial as well as extensive excerpts;

(2) motions and responses irrelevant to the issues on appeal; and (3) trial briefs and discovery papers). At

other times it lacks essential information (e.g., it omits multiple evidentiary exhibits introduced at trial). See

Tenn. R. App. P. 24(a).

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